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ISA Allowance – Understand your tax-free savings options

Knowing you can save tax free with an ISA wrapper on your savings, you may be wondering what the limit you can save every year is. Well wonder no more, as in this handy guide we’ll give you all the ISA allowance info you need!

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Important information - investment value can go up or down and you could get back less than you invest. If you're in any doubt about the suitability of a Stocks & Shares ISA, you should seek independent financial advice. The tax treatment of this product depends on your individual circumstances and may change in future. If you are uncertain about the tax treatment of the product you should contact HMRC or seek independent tax advice.

What is the ISA Allowance

In a nutshell, this allowance is how much any one person can put into their ISA account each year. This is set for each and every tax year – from April the 6th to the 5th of April the following year. You can’t carry over any unused allowance you have to the next year – so make sure you make the most out of it!

The best way to think about an ISA is a sort of ‘protection’ for your money against tax. This protection is only for a certain allowance of money though each year, and means that any interest you earn on this protected money won’t be subject to capital gains tax or interest tax. This gives you a bit more potential for your savings.

Why do ISAs have this set allowance?

The government makes a huge chunk of money by taxing the returns people make on both savings and investments – approximately £10 billion last year! This chunk of money from the taxation of savings is a vital part of the government’s budget, so they have to limit how much each person can save every tax year without paying tax.

The government wants to help people save their money though and so they cam up with some ways that people can save a certain amount of money from tax: ISAs and the Personal Savings Allowance (PSA). These were put in place to help people who want to save money and gives them a bit of leeway when it comes to taxation on their savings.

How is the ISA allowance calculated?

The tax rules for ISAs and ISA allowance are calculated every year by the HMRC (HM Revenue & Customs). These figure are calculated using the inflation figure from September the previous year. The specific inflation measure that is used to calculate the ISA allowance is the CPI or Consumer Prices Index.

Once the HMRC has this figure for the allowance that tax year, then the number is confirmed by the Chancellor of the Exchequer. This confirmation is made in the Autumn statement from the Chancellor, which in itself is a kind of ‘miniature budget’ that takes place at the back end of the year.

ISA Allowance for 2022

The annual ISA allowance for the 2021-2022 tax year is £20,000. Whilst you can have as many different types of ISA as you like, you can only pay into one types of ISA per year. You can use this allowance in a number of ways, including:

Using your ISA allowance in full

If you want to, you can put your full ISA allowance into one type of ISA. These include cash ISAs, Fixed rate cash ISAs an investment ISA such as a stocks and shares ISA, or an innovative finance ISA. With this option, you’d pay the full £20,000 into the ISA of your choice.

Split your ISA allowance up

With this option, you can use your allowance over the four different types of ISA as you please. This is subject to individual account limits. But as long as you don’t pay more than the allowance – £20,000 – across all of your ISA accounts.

With this option, you could put £10,000 of your savings into a standard ISA, where it would be safe and guaranteed a certain interest. You could then put the remaining £10,000 into a stocks & shares ISA, which is a bit riskier but usual has higher interest rates. This is all down to how you want to split up your money.

There are a few things to note in relation to specific ISA allowances though:

The help to buy ISA allowance works a bit different. If you opened up one of these ISAs before the 30th November 2019, then you can deposit up-to £1,200 in the first month and then up-to £200 every calendar month until the end of November 2029. This Help to Buy ISA is technically counted as a cash ISA, so it counts towards you cash ISA allowance for that year!

A Lifetime ISA also has a specific allowance of just £4,000 per tax year.

What’s the Junior ISA Allowance?

The Junior ISA allowance differs slightly from the cash ISA version. These ISAs for children have a smaller allowance of just £9,000 per tax year. This was raised in April of 2020 from £4,368 per tax year.

There are also a few other changes you may want to take note of with a Junior ISA. You can only have one stocks and shares junior ISA at any time – whereas with a cash ISA you can have one year. The child will also not be able to withdraw money from the account until they turn 18.

Does Taking Money Out Affect The Allowance?

The ISA rules that are put in place don’t just affect the amount of money you can put into an ISA. Some ISA providers will have a flexible account, which allows you to withdraw money from an ISA account and replace the missing money without it counting towards your yearly allowance.

With these types of account, you’ll often find that one of the terms for this flexibility is that you replace the money within the same tax year that you made the withdrawal. If you somehow put the money back in the next tax year, then the money will be counted towards the allowance for this new tax year.

This applies as well to stocks and shares ISAs and innovative finance isas, but not to Lifetime ISAs or Junior ISAs.

ISA Allowance FAQs

What’s this years allowance?

The tax free allowance for an Individual Savings Account or ISA for this Tax year is £20,000.

Does transferring your ISA to a new ISA affect your ISA limit?

As long as you fill out the correct paperwork and go through the proper channels, transferring your ISA from one ISA provider to another does not count towards your allowance for that year. This allows you to shop around the best rates!

Can you split up an ISA allowance?

Yes, you can! You can divide your £20,000 allowance across different ISAs. You can split the amount in whatever percentage you like between a cash ISA and a stocks & shares ISA as long as the total amount is within your yearly allowance.