Financial journalist Martin Lewis has moved to clear up widespread confusion about how Individual Savings Account (ISA) allowances function, specifically addressing fears that long-term savings could lose their tax-free status.
The Annual Allowance Explained
During a recent episode of his BBC podcast, Lewis tackled a listener's query that gets to the heart of how ISAs build wealth over time. The question posed a scenario where an individual saves the full £20,000 annual allowance in one tax year, and then deposits another £20,000 on the very first day of the next tax year.
The listener wanted to know if the original £20,000 would suddenly become taxable, given that the total across the two years would be £40,000. Lewis offered a definitive and reassuring answer.
"Simple answer, yes you can. That's exactly how it works," stated Lewis. "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."
He elaborated that you can invest the maximum each year, and the cumulative total remains protected from tax. This mechanism is fundamental to building a significant tax-free nest egg over several years.
A Common ISA Transfer Mistake
Beyond the annual limit, Lewis highlighted a frequent area of misunderstanding that stops people from getting the best rates on their savings. Many are anxious that moving an existing cash ISA to a new provider to secure a better interest rate will consume part of their current year's allowance.
"It doesn't," Lewis clarified. "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."
He stressed there is no timing restriction on such transfers, and they have no impact on how much new money you can add in the future.
Upcoming Changes to ISA Rules
Savers also need to be aware of significant changes to ISA allowances confirmed in the recent Autumn Budget. While the overall annual limit remains at £20,000, its composition will alter from April 2027.
From that date, only £12,000 of the allowance can be allocated freely to either a Cash ISA or a Stocks and Shares ISA. The remaining £8,000 will be reserved exclusively for investment into a Stocks and Shares ISA. These new rules will not apply to savers aged over 65, who will retain the current £20,000 flexible allowance.
Lewis also reminded listeners of the separate Junior ISA allowance, which is available for children under 18. Parents or guardians can deposit up to £9,000 per year into these accounts, and this limit is set to stay unchanged until at least April 2031. The funds belong to the child, who can manage the account from 16 and access it at 18.
