UK ISA Rules for 2024: What You Need to Know

UK ISAs, the way to save money tax free have changed in 2024. Here we help you navigate the changes to ensure you get the most out of your money without losing out to the taxman. 

Money sitting doing nothing is losing value. In the 12 months to December 2023, the Consumer Price Index (CPI), the price we pay for goods and services rose by 4.2%. That means that the real world purchasing power of your money went down. 

The Bank of England provide a tool to demonstrate changes in purchasing power. To demonstrate how your money loses value over time, consider the COVID pandemic in 2020. £100 worth of goods at the start of the pandemic would now cost you £122.34 in March 24. That’s £22.34 more in the space of 4 years. Unless you are putting your money to work you are losing purchasing power. 

This increase in costs is called inflation.

Inflation has been at record highs for the last few years, hitting 11.2% in October 2022. To combat rising inflation, the Bank of England increased interest rates between December 2021 and August 2023 and have held them at 5.25% since. Raising interest rates means it’s more expensive for businesses and consumers to borrow money. As a result people have less money to spend. This in turn should reduce spending and hence encourage prices to fall, or at least rise less quickly, hopefully lowering inflation. 

This is a slow process however there have been signs inflation is getting closer to the 2% Bank of England target. Hopefully the highs of October 2022 are now behind us.

Interest rates have a huge impact on those with mortgages as the monthly payments will increase. However as the cost of borrowing increases, so do savings rates. The current Bank of England Base rate of 5.25% means a typical high yield savings account now pays around 5% in interest vs 1% a few years ago. Whilst positive for savers, this increase can catch people out. 

In the UK in 2024 you are entitled to a tax free savings allowance of:

• £1000 for basic rate tax payers (up to £37,700 income per year)
• £500 for higher rate tax payers (£37,701 to £125,140 income per year)
• £0 for additional rate tax payers (over £125,140 income per year)

Whilst still a significant sum of money, the 5% savings interest rate means as a basic rate tax payer you only need to have £20,000 in savings to start being taxed on your savings income. As a higher rate taxpayer that lowers to £10,000. As a basic rate tax payer between 2009 and 2018 you’d have needed £200,000 to hit this limit!

An ISA is an Individual Savings Account allowing you to save tax free.

In an era of high interest rates, tax free saving makes an ISA extremely valuable.

In the UK for 2024 you get an ISA allowance of £20,000. This means you can invest £20k in ISAs (per year) without paying any tax on your returns. 

There are four types of ISA you can have in the UK:

Cash ISA

Simply put in your cash like you would in a savings account. You can get easy access, fixed term and flexible variants. Please check the restrictions on each account as these may impact when and how you can access your money. 

Lifetime ISA

Available in both cash and stocks and shares variants. You must be over 18 and under 40 to open a LISA. You can put in a maximum of £4,000 a year up until you’re 50. Access to your funds is restricted to:

• When you are 60 or over
• When you buy your first home costing £450,000 or less
• If you are diagnosed as terminally ill with less than 12 months to live

The advantage of the LISA however is that the government will top up what you put in by 25%. If you put the maximum of £4,000 in, you’ll get a free £1,000 added by the government. If you withdraw money for any reason not listed above, you’ll be hit with a 25% withdrawal penalty. For example if you put the full yearly £4,000 allowance in and withdrew with the penalty, you’d only get £3,750 back meaning you’d have lost £250, 6.25% of what you put in.

Stocks and Shares ISA

A Stocks and Shares ISA allows you to invest in the stock market in the form of funds, shares and bonds without having to pay any tax on your capital gains or dividends. This works very much like a traditional General Investment Account (GIA) except no tax is paid. 

Many in the UK fear the stock market, and it’s true it comes with risk. Over the last 20 years the FTSE AlI-World Index (a measure of the global stock market) has shown compound annual growth rate of 9.98%. In the same period, interest rates have not passed 5.75%. Whilst the stock market is volatile, history shows over a long period these returns have been higher than you’d see in a cash ISA or savings account. Do however remember past performance does not guarantee future results. 

Innovative Finance ISA

A common use of a IFISA is peer-to-peer lending. Often high risk, this is best reserved for those who are aiming for high reward but prepared to take high risks. 

The allowance for what you can pay into ISAs remains the same in 2024 at £20,000. The big change in 2024 is that you can now open and contribute to more than one of any type of ISA within a tax year (except LISA which remains at one per tax year). 

This gives you much more flexibility to open new ISAs to get the best rates and any introductory offers. On the other hand, it makes it harder to track your overall ISA allowance.

2024 also brings a change to ISA transfers. You can now perform partial transfers, so for example if you had £10,000 in an existing cash ISA, you could opt to transfer part of this, say £5,000 into a different ISA. As this is a transfer this would not count towards your current tax year’s ISA allowance. 

A final change, although unconfirmed as it is still in review, is the introduction of the British ISA. This is a new type of ISA, very similar to a stocks and shares ISA that only allows investment in UK businesses.

This will come with a new, independent £5,000 allowance and is designed to encourage tax free investing in the UK economy. This is currently going through a consultation process so may never see the light of day, but it’s one to keep an eye on for the future as for those lucky enough to max out their ISA allowance each year, it could give an additional £5,000 of tax free investing. 

Remember you can only put in a total of £20,000 per tax year across all of your ISAs. The responsibility for keeping track of your allowance is down to you. Most providers will show an easy to read ISA allowance utilisation figure. Take caution however as an ISA provider can only show what you have invested with them. All providers report back to HMRC each year so you could get into trouble if you don’t get this right.

Another key thing to remember is by default you can’t get money out of an ISA and put it back in without using your allowance. There are some exceptions with ‘flexible ISAs’ however please check the terms and conditions. This means if you invest £10,000 then later withdraw £5,000, only to put it back in during the same tax year, you will have used £15,000 of your ISA allowance. The ISA allowance only measures what you put in and does not take into account any withdrawals. 

All in all, these are positive changes for 2024, and provide much more flexibility, just make sure you keep track of your ISA limits. 

I’m not a financial advisor and the contents of this blog are written for information and entertainment purposes. Please do your own research and seek professional advice before making financial decisions.