Martin Lewis clarifies ISA deposit guidelines as ‘that is precisely the way it works’
ISAs are tax-free as long as you stay within certain limits
Financial expert Martin Lewis has clarified the workings of ISA allowances. The founder of MoneySavingExpert spelled out the rules for the tax-free accounts on his BBC podcast. At present, you can deposit up to £20,000 each year into ISAs.
Savers can split this allowance between cash ISAs and stocks and shares ISAs. One of the key benefits of ISAs is that any interest or investment gains accrued within these accounts are entirely tax-free, as long as you don’t go over your yearly limit.
A listener reached out to his BBC podcast to ask for clarification on how these annual limits work. The listener proposed a hypothetical scenario where someone maxes out their £20,000 allowance in one tax year, then deposits another full £20,000 on the first day of the new tax year. The question was whether the initial £20,000 would be subject to tax, considering they’d have amassed a total of £40,000 by the end of the second year.
The same query was rephrased, asking if saving £20,000 per year over four years, resulting in total deposits of £80,000, would all stay within the tax-free limit. Mr Lewis answered: “Simple answer, yes you can. That’s exactly how it works.
“Your ISA allowance is an annual allowance. Once the money is in a cash ISA or a stocks and shares ISA, it remains tax-free, in perpetuity, as long as it’s inside the ISA wrapper.” The financial expert continued by further explaining the regulations surrounding ISA allowances.
He told listeners: “You can put the maximum ISA allowance in this year and then you can put a whole new ISA allowance in at the start of the next tax year, and the same the tax year after that, and the same the tax year after that. That’s the way ISAs work, and that’s what enables people to build money in it.”
A common mistake around ISAs
Nevertheless, Mr Lewis also drew attention to a widespread misconception regarding ISAs. He said: “Just to be clear on this, people are always worried that when they have a cash ISA and they want to transfer it to a new cash ISA provider to increase the rate, that that will use up their annual allowance.
“It doesn’t – the allowance is simply on new money that you are putting in ISAs, that has not been in ISAs before. Money already in ISAs, even if you’re transferring it from a cash ISA to a shares ISA, does not use up your annual allowance. There’s no timing issue on doing it. It’s only new money going in that affects how much you in future.”
Changes to ISA allowances
ISA holders should be aware of a major change to ISA allowances revealed in the Autumn Budget. Starting from the April 2027 tax year, while the £20,000 allowance will remain in place, only £12,000 of this sum will be available for either cash ISA or stocks and shares ISA contributions.
The outstanding £8,000 can only be assigned to stocks and shares ISAs. These updated regulations will not impact people aged over 65, who will retain the existing £20,000 allowance.
Another ISA limit to bear in mind is the junior ISA allowance, which is distinct from the £20,000 adult allowance and applies for children under 18. You can deposit up to £9,000 a year into these accounts for a child. This allowance will stay the same until April 2031.
Parents or guardians with parental responsibility can open a junior ISA and manage the account, but the money belongs to the child. The child can take control of the account when they turn 16, but they can’t withdraw the funds until they are 18.
