What Is the Stocks and Shares ISA Allowance?
The Stocks and Shares ISA allowance is the amount you can save in your tax-advantaged savings account. It’s called an ‘ISA’ because it stands for Individual Savings Account, which the government first introduced in 1999 to replace personal equity plans (PEPs) and lifetime individual saving accounts (LISAs1).
The current stocks & shares ISA limit is £20,000 per year, but this will be changing soon.
The ISA allowance 2020-2021 is going up from £20,000 to £25,000, which means that people will be able to save more money in this tax-advantaged account. The good news for current investors and savers is that they can start saving the new limit immediately without waiting until April 2020, when the changes occur.
One reason why many people invest their savings into stocks and shares ISAs is because it’s free from income tax.
So any growth or profits are completely untaxed as long as you don’t withdraw them before age 50 (or different circumstances). It also provides a greater range of investment choices than other ISAs, which could mean a more diversified portfolio.
How Does the ISA Allowance Work?
The ISA allowance is the total amount of savings a person can put into an individual savings account (ISA) each year. It’s one incentive to save money for retirement, or just in case you want to buy something big without needing cash later on.
This government scheme enables people aged 18 and over to invest up to £20,000 per tax year from either their income or personal savings fund – whichever provides the higher percentage – as long as they have no other type of ISAs already open with this current provider.
As well as stocks and shares, there are also ‘cash’ ISAs that allow you to take out your funds at any time without paying any penalties, but these don’t come with all the benefits that stocks and shares provide, so it’s best to start with one of these.
What Happens If I Do Not Use My ISA Allowance?
The ISA allowance is £20,000 per tax year. If you do not use your entire ISA allowance in a tax year, then the unused portion will be carried over to the next one. For example: if your annual ISA allowance is £25,000 and you only invest £15,000 this year, then for 2020-21, your new maximum limit would be set at £30,000 (£25k + 15k).
This carryover can continue until 30 September 2021 – after this point, any remaining amount will be completely lost.
If you do not use your ISA allowance at all, then the unused portion of it will carry over to the next year and cannot exceed £30,000 (also known as an Adult Cash ISA). After September 2021, any remaining amount will be completely lost.
Your ISA Allowance Resets Every Year
Your ISA allowance resets every year based on your age when they turn 18 or the day after their birthday each time (if not yet). It does not change if you save a certain amount in any given year – it just carries over from one tax year to another.
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For example: say someone turns 20 this March, so their new maximum limit would now be £6000 (£2500 + 3000) and so on.
The ISA allowance has increased year-on-year since 2000 in what was a clear intention by the government to make saving easier and more accessible for younger people. To give an idea of how much it had changed, £5000 would have been enough to invest towards your first property purchase back in April 2000, but eighteen years later, you will need around double that amount (£11000) (source: Telegraph).
Historical ISA Allowances
In 2000 the maximum ISA allowance was £5000
In 2001, it increased to £6000
In 2002, it increased again to £8000
Then in 2006, they reached £10000.
Finally, from 2009 onwards, there has been no limit on what you can invest into your savings account as long as you are a UK resident aged 18 or over and have not yet reached their full state pension entitlement (currently at age 66).
The increase that we saw this April, for example, is because of two factors: firstly, because the tax year ends in April rather than December like most other years; secondly, that recent inflation data meant that an extra pound would be worth less than it was before.
In October 2016, the UK government announced an increase in adult ISA allowance for 2017-2018 from £15000 to £20500 but then this April; we saw another bump up of a further 500 pounds to take us back to the original limit of £11000.
This is because, according to HMRC’s2 official inflation data, last year’s rise wasn’t enough, and as such, they have increased by 50% again (for 2018/2019).
The latest figures available show that inflation from September 2017 through December 2018 has been at a higher level every month, meaning that prices on average are now 59p more expensive each day than they were a year ago.
Is My ISA Allowance Split across All Types of ISAS?
The ISA allowance is split across all types of ISAs. If you have a Cash and stocks & shares ISA, then your annual allowance limit would be £25k in each type of account.
Can I Inherit an ISA Allowance from a Spouse or Civil Partner?
If you are married or in a civil partnership and your spouse/civil partner dies, then you have the option to inherit their ISA allowance.
Can I Transfer My ISA Allowance from One Person to Another?
To transfer your ISA allowance, you would need to contact the ISA provider and complete a Transfer of Isa (TISA) form.
What If I Withdraw or Spend More than My ISA Allowance on One of the Types of Accounts?
If you withdraw or spend more than your ISA allowance, then the excess amount will be taxed as normal income, and a 25% penalty may also apply.
The allowance is an excellent opportunity for students to learn how money works in real life. It will also allow them to manage their budget and make an informed decision about where they spend their money, which can help build good financial habits that last into adulthood.