25 years of ISAs

April 2024 marked the 25th anniversary of Individual Savings Accounts (ISAs) being introduced. For two and a half decades ISAs have often been the first port of call for investors because of their tax efficiency and flexibility when compared to other tax wrappers.

The ISA functions as a tax-free savings and investment scheme, offering investors returns that are exempt from both UK income tax and capital gains tax while providing more accessibility than a pension. With new types of ISA evolving over the years with the shifting financial landscapes, ISAs have demonstrated adaptability, addressing a spectrum of investor needs while mirroring the government’s endeavours to stimulate saving and investment.

Prior to April 2008, investors could opt for one of two types of ISA each tax year: either a maxi-ISA or a mini-ISA. A mini-ISA had the flexibility to contain either cash or stocks, a maxi-ISA had the capacity to hold both cash and stocks simultaneously. From 6 April 2008, this separation ceased to exist. Instead, it was replaced by the labelling of a stocks and shares ISA and a cash ISA.

The Help to Buy ISA was introduced from 1 December 2015, which was a cash ISA for first-time house buyers that offered a government bonus when the proceeds were used to purchase a first home. From 30 November 2019 it has no longer been possible to open a Help to Buy ISA account.

In April 2016 Innovative Finance ISAs (IFISAs) were introduced. These ISAs resemble cash and stocks and shares ISAs but are specifically tailored for peer-to-peer lending investments, which were previously ineligible for ISA inclusion.

Introduced in April 2017, the LISA is available to investors aged up to age 39 and subscriptions must cease once the investor turns 50. The government supplements the account with a 25% bonus on subscriptions made, which can be clawed back—along with an additional 5% penalty—if funds are withdrawn before age 60, unless for the purchase of a first home valued at £450,000 or less. LISAs permit investment in cash or stocks and shares, with no restrictions on the allocation between the two.

Junior ISAs (JISAs) were introduced on 1 November 2011, as an option for children under age 18 that share the same features with existing adult ISA products. JISAs are available in both cash and stocks and shares types but funds cannot be withdrawn until age 18 when the JISA converts to its adult variety.

When introduced originally ISAs had an annual subscription limit of £7,000, with a maximum of £3,000 in the cash component. The allowance increased gradually over the years with inflation and government policies aimed at encouraging saving and investment. In 2014 the allowance was raised to £15,000, with no specific limit on cash, and then again in 2017 to £20,000 where it has remained since. The Lifetime ISA has its own separate limit of £4,000 which sits within the overall £20,000 annual allowance. Junior ISAs have a lower allowance which started at £3,600 initially in 2011 and now sits at £9,000 per annum.

Since their inception, ISAs have emerged as a foundational pillar for investors, characterised by their tax efficiency and flexibility, and the government continues to build on this popularity. Another new potential type of ISA is being explored with the Chancellor announcing in the budget plans to consult on the introduction of a UK ISA with the policy objective of supporting a culture of investment in the UK. The initial plans are to offer an allowance of £5,000 in addition to the existing ISA allowance providing it’s invested in the UK only. As the consultation process unfolds, we’ll need to wait for further clarification on the operational mechanics and eligibility criteria of this new ISA.

With the proposal for a UK ISA on the horizon, the government is signalling that ISAs will continue to evolve into the future. As stakeholders await the outcome of the consultation process, one certainty emerges: the enduring legacy of ISAs as a quintessential instrument for financial planning is poised to persist well into the future.