What is a flexible ISA?

Flexible ISAs can be a great way to save or invest your money, while still being able to access it if you need to.

So, what is a flexible ISA? Find out what you need to know right here.

Also consider: Read about ISA rate changes in 2024

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What is a flexible ISA?

Flexible ISAs work by allowing you to withdraw money from your tax-efficient account and then put it back in during the same tax year without it counting towards the current year’s ISA allowance. The ISA allowance in the 2022/23 tax year is £20,000.

Flexible ISAs can be useful as they keep your money Capital Gains Tax- (CGT) and Income Tax-free, while also ensuring that you have access to your money in the event that you need it.

It’s important to remember that not all ISAs are flexible. Check with your provider first to find out whether your account is a flexible ISA.

An example of using flexible ISAs

Imagine you have an ISA with £30,000 in – £20,000 of which you put in during the 2021/22 tax year, and £10,000 that you put in this tax year when your allowance reset on 6 April 2022.

If that ISA was flexible, you could then withdraw money from it, even up to the full amount if you’d like to. Let’s say you take £5,000 out to pay for a holiday, plus some bits and pieces around the home.

That means you’d then be free to put £15,000 back into your ISA, as that’s the £5,000 you flexibly withdrew plus your remaining £10,000 allowance for the current tax year.

Bear in mind that you must do so within the same tax year – in this case, before midnight on 5 April 2023. If you don’t, your contribution will count towards next year’s allowance.

You’d have to use any remaining allowance if your ISA wasn’t flexible

Now imagine you have an ISA that isn’t flexible. In this case, you have £18,000 in your account, all of which you contributed this tax year. That means you have £2,000 of your allowance remaining.

You withdraw £5,000 to cover some unexpected costs, leaving £13,000 in your account. Then, later on in the same tax year, you have £5,000 in savings to spare so you decide to put it back into your ISA.

However, as your ISA is not flexible, you’ll only be able to contribute a further £2,000, as that’s all the allowance you had left.

That means, even though there’s now only £15,000 in your ISA, you’ll still have used your entire £20,000 allowance.

So, you can see the immense value a flexible ISA could provide, offering you access to your money while still being able to make the most of your ISA allowance.

Make sure you choose an ISA provider that’s authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority.

Please note that providers may withdraw their flexible ISA products at any time.

Multiple types of ISA can be flexible

In general, there are three kinds of accounts that come with ISA flexibility: Cash ISAs, Stocks and Shares ISA, and Innovative Finance ISAs.

Cash ISAs

As the name suggests, Cash ISAs allow you to hold your money in cash while shielding it from Income Tax and CGT.

Many Cash ISAs available are now flexible but, in general, easy-access ISAs are more likely to be flexible than fixed-rate cash ISAs.

Cash ISAs are especially useful if you have exceeded your tax-free Personal Savings Allowance for interest on your savings account, as any interest generated will be free from Income Tax.

Stocks and Shares ISAs

Stocks and Shares ISAs allow you to hold investments within the ISA wrapper.

Bear in mind that only cash in a Stocks and Shares ISA is flexible. Any shares, bonds, funds, or any other elements in your investment portfolio contained in your ISA cannot be flexibly withdrawn.

You would have to sell investments and convert them to cash if you wanted to flexibly withdraw all your holdings.

Innovative Finance ISAs

In an Innovative Finance ISA, you can peer-to-peer lend your money to individuals or businesses looking to borrow.

Peer-to-peer savings like this can be flexibly withdrawn and paid back in during the same tax year.

Bear in mind that these complex accounts are generally only suitable for experienced or institutional investors.

Flexible ISA rules

There are a few key additional rules to bear in mind if you want to open and use the flexibility of an ISA.

Flexibility depends on when money was added to the account

It’s important to know that the flexibility you’ll have depends on when you contributed money to your ISA.

You contributed to your ISA in this tax year only

In this instance, you can withdraw however much you’ve put in and then replace these funds without using any more of your allowance, provided you do so in the same tax year.

You contributed to your ISA in previous tax years only

If your ISA only contains money from previous tax years, you can take out as much as you like and pay it back in without using any more of your allowance.

You contributed to your ISA in both this tax year and in previous years

If you’ve contributed this year and in previous tax years, then withdrawing more than you’ve contributed this tax year creates a “flexible ISA allowance”.

So, for example, if you have £20,000 from last tax year and you’ve used £5,000 of your allowance this tax year, that means you have £15,000 of ISA allowance left.

If you then withdraw £10,000 from your ISA, you’ll be able to pay £25,000 back into that same ISA account – that’s £10,000 of your flexible allowance, plus your remaining £15,000 ISA allowance for that tax year.

You must put withdrawn funds back into the account they came from – unless that account is now closed or you use another flexible ISA

A key thing to bear in mind with a flexible ISA is that you must pay the withdrawn funds into the same account they came from in order to avoid using any of your ISA annual allowance.

There are two key exceptions to this rule:

1. If you fully withdrew the funds and closed the account. In that instance, you could open a new Cash ISA and flexibly pay into it. You can only do this once each tax year.
2. You could withdraw cash from one flexible ISA and pay it into another. For example, you could take money from a flexible Cash ISA and put it into a flexible Stocks and Shares or Innovative Finance ISA without using any of your annual tax-free allowance.

You’ll lose your flexibility if you transfer your ISA

If you withdraw funds from your flexible ISA and then transfer your account to a different provider, you will lose your flexible amount. That means you’ll have to use any remaining ISA allowance to make payments into your ISA.

Not all ISAs are flexible

While Cash ISAs, Stocks and Shares ISAs, and Innovative Finance ISAs can be flexible, not all ISAs are.

Providers decide whether their ISA is flexible or not. So, if your provider has not described their ISA as flexible, it probably isn’t. Check with individual providers to find out whether the product they offer is flexible.

Additionally, certain types of ISAs are not flexible, including Help to Buy ISAs, Lifetime ISAs, and Junior ISAs. So, if you want to save or invest money using these accounts, bear in mind that you won’t be able to withdraw funds and pay them back in without using more of your allowance.

Lifetime ISAs (LISAs) even have a 25% government penalty fee if you withdraw your money without buying a first home or before the age of 60.

Make sure you understand these rules before you put money into your account.

What is a flexible ISA FAQs

Here are some of the most frequently asked questions regarding flexible ISAs