Can I Put £20000 in an ISA every year | Moneyfarm (2024)

If there’s ever a time to get your investments in order, it’s the beginning of the new tax year. With annual allowances pre-set, it is the opportunity for you to evaluate your plans for the coming year. Consider where your money sits, and how you should contribute in order to make the most of it and take whatever tax benefits are on offer when you choose to invest it in the best ISA.

It’s also the time to consider how much of your £20,000 annual ISA allowance to use in your individual savings accounts (ISAs) – for a full breakdown of how ISA limits work, read our guide.

You can put your full ISA allowance into what you consider to be your best ISA or spread it across a mixture of different ISA types or portfolios. Please read on to find out all you need to know about how to invest your £20,000 allowance tax-free. Alternatively, get in touch, and we can talk you through your options.

How does the ISA annual allowance work in practice?

An individual savings account (ISA) is a tax-free savings account that allows you to invest or save money in the UK. You can set aside money in the best ISA for you personally each tax year without having to pay tax on your returns. But you can only invest a set amount into an ISA each tax year.

The tax year starts on April 6 and ends on April 5 of the following year. The total ISA allowance for the 2024/25 tax year is £20,000. It’s the same as it was in 2023-24; in fact, not only was the ISA limit still £20k, but the £20k cap has remained unaltered since the 2017-18 tax year.

Hopes were high that the cap would be raised this year, but the spring budget saw the allowance unchanged. However, plans were announced to create a new “British ISA.” The UK ISA consultation has already taken place. It ended on June 6, 2024. It now looks like the new so-called “UK ISA” will be launched sometime after the forthcoming general election.

If it does launch, it will mean that in addition to the existing £20K allowance, you will also be allowed to invest a further £5K in this new ISA option. In other words, when it’s available, you have one or more of the current ISAs, and you choose to open a UK ISA, your overall annual allowance will increase to £25K.

But at present, you can put a maximum of £20,000 into an ISA account without paying taxes. Any unused allowance is not carried over into the next tax year’s allowance. Once a new tax year starts (which is always on April 6), you will be given a new one in accordance with government ISA regulations.

For the avoidance of doubt, if you’re asking yourself, “Can I have more than £20K in an ISA,” the answer is yes, you can. You can accumulate as much as you like, but the tax-free annual contribution is £20,000.

The four main types of ISA

There are four main types of ISA accounts. The best ISA for you depends on your investor profile and your financial goals. The current types include cash ISAs, lifetime ISAs, innovative finance ISAs, and stocks and shares ISAs. The current ISA rules allow you to open as many ISAs as you like in the same tax year, Previously you could only open one.

There is also a 5th ISA, the JISA or Junior ISA. However, any money invested in these no longer belongs to you – it belongs to the child in whose name the JISA was registered. Because it’s not your money, it does not affect your personal annual ISA allowance. There are two types of Junior ISAs – cash or stocks and shares.

While the annual allowances might change depending on the type of ISA, all ISAs offer the same tax benefits, which we discuss in more detail in the section below.

All ISAs carry a degree of risk. The least risk is associated with cash ISAs. The riskiest of all are innovative finance ISAs, which are associated with crowdfunding and peer-to-peer lending. Also, these ISAs are not protected by the FSCS (Financial Services Compensation Scheme).

The tax advantages of the ISA allowance

All ISAs are what are known as tax wrappers. It’s the reason they are so popular. Providing you remain within the annual allowances; all contributions are tax-free. Another advantage is that any growth in the value of your fund is free from capital gains tax. Last but by no means least, all withdrawals are protected from income tax. In actual fact, you are not even required to list your ISAs in any tax returns you might make.

How does the ISA allowance differ from type to type?

When we talk about investing in an individual savings account, we generally mean stocks and shares ISAs. However, if you are wondering, ‘Can I put 20000 in an ISA every year?’ the answer is yes, but the different types of ISAs come with different ISA allowance rules. The most common types of ISA are cash ISAs, Junior ISAs and Lifetime ISAs.

The allowance for cash ISAs is the same as stocks and shares and innovative finance ISAs in any given tax year – £20,000. The only real difference with cash ISAs is the assets in which you’re investing. There is no cash ISA limit; in fact, none of the ISAs have a cash limit.

The Junior ISA cap is, £9,000 for the 2024/25 tax year. A parent or guardian can invest in Junior ISAs, either cash or stocks and shares JISAs, which can only be accessed by the child once they turn 18. They can, however, manage the account from 16 onwards.

The allowance for lifetime ISAs in the 2024/25 tax year is somewhat complicated. You can only invest £4,000 per year into this type of ISA and must contribute at least once before turning 40. Also, you can only contribute to the LISA until you’re 50. If these conditions are met, the government will add a 25% bonus to your pot, worth up to £1,000 per year. Contributions into a life time ISA are also used to help with first-time property purchases.

The stocks and shares ISA could be the best ISA if you’re looking to invest a substantial amount in a tax-free manner. However, if you want to use all of your ISA allowance for 2024/25 or even just part of it, we recommend doing some thorough research before you start.

Historical Changes to the ISA cap

The table below shows the history of ISA allowances since they were first introduced.

For the avoidance of doubt, the maximum combined total you can contribute across all ISAs in any one tax year is £20,000. Alternatively, this maximum can be shared between all types.

Here are examples of how you can spread your allowance across the various types of ISAs.

• You can invest £12,000 in a stocks and shares ISA in a tax year, plus £7,000 in a cash ISA and £1,000 in a lifetime ISA.
• You can invest £10,000 in a cash ISA, £5,000 in a stocks and shares ISA, £2,000 in a lifetime ISA and £3,000 in an innovative finance ISA.

As well as being able to open as many ISAs as you like in the same tax year, the spring budget of 2024 also relaxed the rule on ISA transfers. You can now carry out partial transfers if you’re moving funds to a different provider.

Use as much as possible

With any type of ISA, the first point to make is straightforward: utilise as much of your annual ISA allowance as you can afford. Of course, this doesn’t mean that you have to put £20,000 into your ISA account every year. Very few people can afford to do that. What it does mean, however, is that you could better utilise any excess money you have by saving or investing in one of the types of ISAs.

As long as you’ve paid off any existing, expensive debt and saved enough as a rainy-day or emergency fund, utilising as much of your allowance as possible is highly recommended. These allowances operate on a ‘use it or lose it’ basis. Any unused annual allowance from the previous tax year can’t be rolled over.

There is also a question about when you should invest. The answer is almost always “now.” We’ve written a few times about the pitfalls of trying to time the market or holding off on investing for whatever reason. In most cases, it’s more beneficial for you to invest as early as possible and avoid missing out on the historic ‘boom days’ that can supposedly make all the difference to long-term returns.

Consider multiple portfolios

Understanding how ISAs work is just as important as asking the question, “Can I put £20,000 in an ISA every year?” For example, before April 2024, you could pay into any number of ISAs as long as they were different types. So, you couldn’t for example, pay into two stocks and shares ISAs in the same year. That changed in April 2024, so if you have more than one stocks and shares ISA (or any other type of ISA, excepting the Junior ISA), you can select the best ISA and contribute more to that one than to the others in the same tax year if you so wish.

It’s worth knowing that Moneyfarm ISAs will allow you to create multiple portfolios within one single ISA account. In effect, this means you have one ISA account, but it’s diversified across several portfolios.

There are a few reasons why you might want to do this. The most common is as a means of gradually introducing your money into the financial markets through drip-feeding rather than investing one large lump sum. This enables you to react to current trends.

For example, if you have an ISA with a medium-high-risk portfolio that you use for your long-term investing, but your tolerance to risk has been pushed near its limit by changing economic circ*mstances, you might be wary about adding more funds. Instead, you can open or start transferring money into lower-risk stocks or funds within the same existing ISA.

But if you’re introducing new money and moving existing money around between portfolios, you need to keep a clear record of how much of your £20,000 allowance you’ve used and perhaps plan ahead with your investment consultant.

By keeping your savings within your ISA portfolio it enables you to leverage the tax benefits of your £20,000 ISA allowance without committing all your money to a higher-risk portfolio.

Opening a second portfolio within the same ISA is simple with a Moneyfarm account. All you have to do is follow the online portfolio creation process or simply contact a member of our investment consultancy team to get one set up.

Compound interest – Albert Einstein’s 8th wonder of the world?

Because the interest that is applied to all ISAs is compound interest, it means that your savings can grow at an accumulative rate. Whether true or not, it is often said that when Albert Einstein was asked what he considered man’s best invention, he replied it was “compound interest.“ It is even claimed that he said it was the 8th wonder of the world.

How the ISA allowance impacts long-term financial planning

The impact that compound interest makes when applied to contributions over the long term is significant, especially if you can afford to maximise your annual ISA allowance and tuck £20,000 away every year.

The best way to explain compound interest is that it facilitates making interest on interest. Each year, the interest is added to the value of the fund, and this increased total then has interest applied and so forth, year on year. If you could afford to invest £20K each year, and it was compounded by 5% per annum, you could reach millionaire status in 25 years.

If interest is applied at 7%, that 25 years drops to 21. Given that medium-risk ISAs have returned an average of 9.64%, that could be achievable if you can afford to maximise your contributions.

The benefits of maximising your ISA allowance

If you can afford to maximise your allowance, there are several reasons why you should do so. They include:

• You cannot carry forward your allowance to the next tax year. If you don’t use it, you lose it.
• Rising stock prices. Investing as much as you can in a stocks and share ISA, provided you are prepared to take some risk, means that you could benefit from rising stock prices.
• Putting compound interest to work. As explained above, compound interest is a powerful tool. When set to work on your funds over the long term, the results are startlingly good.

Comparing the ISA cap with other savings options

ISA savings are more tax efficient than any other types of saving vehicles – including pensions. However, the ISA allowance is only £20k per annum, whereas the pension contribution cap is now £60k. The £20k ISA cap is pretty much on par with the personal safety allowance.

Remember the basics

When using your ISA allowance, the final thing to remember is not to lose sight of the basics. The run-up to the end of the tax year is a big time for financial providers, who will often offer promotions and discounts to encourage people to invest. These are well worth considering, but it’s crucial not to divert from the following fundamentals.

Think long-term. Even in times of relative uncertainty, ISA savings, especially stocks and shares ISA savings, are best considered a long-term investment strategy. Disinvesting, moving money between risk levels, or trying to time the market can be tempting. But sticking with your plan is the best way to reach your long-term goals. Of course, markets will rise and fall in the short term, but the trajectory looks a lot smoother over a longer timeline, especially with stocks and shares ISAs.

Diversification. When deciding how to use your allowance, try to avoid being swayed by the news of certain stocks or markets going through the roof. Betting on the success of a limited pool of assets is inherently risky, so you should remember to keep diversification as a central pillar of your strategy. At Moneyfarm, we invest across asset types and geographies using carefully created ETFs. Such diversification helps to provide our clients with the protection they need.

Get advice. The run-up to the end of the tax year also represents an ideal opportunity to seek advice from your investment consultant. If your ISA provider, like Moneyfarm, offers consultancy at no extra cost, it’s worth checking in to see how your best ISA investments are doing and discussing your options going forward. Semi-regular check-ups like these mean that you’re always kept in the know.

Five reasons why you should use your ISA allowance

1. Tax reliefs and exemptions

Investors who hold their investments in an ISA get tax benefits. You can invest your money in an ISA without paying income tax or capital gains tax. In addition, you don’t pay taxes on the dividends you receive from investments held in an ISA.

1. Minimal amount needed to open and maintain an account

You don’t need thousands of pounds to start investing in an ISA. However, there is a limit to how much you can put in an ISA each year. The ISA allowance for the 2024/25 tax year is £20,000.

1. Give your savings the chance to grow

Along with the tax benefits, ISAs also give your savings a great chance to grow over the long term, thanks to compound interest. Through this and active portfolio management, an ISA becomes a very attractive place for your wealth to be. Of course, investments can go down as well as up, and you may get back less than you put in, but it’s worth exploring your options if you want to protect and grow your wealth long-term.

1. Withdrawal flexibility

ISAs are flexible. You can withdraw and replace cash into a cash ISA account in the same tax year without affecting your annual allowances. However, not all ISA providers offer such flexibility, so ask about it before opening an account.

1. ISA transfers

ISA transfers are possible and straightforward. There are several reasons why you might want to consider transferring your ISAs: you might want to switch providers due to better interest rates, consolidate all your accounts, or transfer your cash ISA into a Stocks and Shares ISA. It is best to be mindful when switching providers. Before transferring your ISA, check what charges, exit penalties, and benefits you might lose. It might be a good idea to seek professional advice.

Case studies – success stories using the full ISA allowance

A little while ago, the Telegraph revealed the portfolios of a number of ISA millionaires. They analysed the 250 portfolios. The findings were that “open-ended” and investment trusts associated with well-known companies on the UK stock markets were the most popular funds chosen.

The common theme throughout was that the fund managers were experts with decades of experience. Typical examples were Job Curtis, a City of London fund manager since 1991, and Neil Woodford, another expert fund manager with 30 years’ worth of experience.

Some funds centre around growth businesses, with investors avoiding risky markets and instead seeking steadily rising returns. The best-performing funds over the past twenty years after ISAs were first introduced are as follows.

In terms of shares, companies include the Ashtead Group, Aviva, BP, British American Tobacco, Diageo, GlaxoSmithKline, Goodwin, HSBC, Legal and General, and Lloyds Bank.

In terms of funds, they include Artemis Income, Bankers, City of London, Fidelity European Value, Fidelity Special Situations, Finsbury Growth and Income, Fundsmith Equity, Invesco Perpetual High Income, Jupiter European, and Law Debenture. To see the complete listing, check out the Telegraph article in question.

The thing that these millionaire investors all have in common is not to panic sell, even in tough times when markets decline. They have the trust and patience to let time do its job.

FAQ

Can I put more than £20,000 in an ISA every year?

No, you can only put up to a maximum of £20K into an ISA each year in accordance with the current annual cap. Alternatively, you can share the ISA allowance across the different types of ISA accounts.

Can I add to my Cash ISA every year?

Yes, you can add money to your Cash ISA every year, as long as the total amount does not exceed the ISA cap for 2024/25 of £20,000. There is no cash ISA limit. If you contribute to more than one type of ISA during the same tax year, this total amount of £20,000 must be split and shared across the ISA accounts.

How often can you add to an ISA?

You can contribute to an ISA as many times as you like in any tax year, provided your overall contribution does not exceed the ISA allowance for 2023-24, which is £20,000.

How many ISAS can I have?

As of April 2024, you can have as many ISA savings accounts as you like – even multiples of the same kind. The only ISA this doesn’t apply to is the Junior ISA. It is only possible to have one of each – one cash JISA, and one stocks and shares JISA.

*Capital at risk. Tax treatment depends on your individual circ*mstances and may be subject to change in the future.