If you’re interested in tax-free savings, you may have heard of ISAs. An Individual Savings Account is a type of savings account that allows you to save money without paying tax on the interest you earn. While it’s a great way to save money, can you have more than one ISA? The short answer is yes, but it’s not as simple as opening multiple accounts and reaping the benefits. Let’s dive deeper into the world of ISAs.
Before we can answer whether you can have more than one ISA, let’s first understand what an ISA is and how it works.
What is an ISA?
An ISA is a type of savings account that’s free from income and capital gains tax. You can save up to a certain amount per tax year, and any interest or gains you make are tax-free. The current allowance is £20,000 per tax year, which means you can save a considerable amount of money tax-free. And all profits are tax-free which means HMRC can’t touch them. Hooray!
Types of ISAs
There are several types of ISAs to choose from, including cash ISAs, stocks and shares ISAs, innovative finance ISAs, and lifetime ISAs. Cash ISAs are savings accounts that earn interest, while stocks and shares ISAs are investment accounts that invest in stocks and shares. Innovative finance ISAs allow you to invest in peer-to-peer lending, while lifetime ISAs are designed to help you save for retirement or your first home.
ISA Allowances and Limits
Each year, you can save up to £20,000 in an ISA. This allowance resets every tax year, which means you can save another £20,000 tax-free in the next tax year. If you don’t use your full ISA allowance in a tax year, you can’t carry it forward to the next tax year.
That said, there is a trick I use with IG’s Flexi-ISA to carry it forward.
- Deposit the maximum allowance in IG’s Flexi Stocks & Shares ISA before the new tax year
- Keep this allowance in and roll it over into the new tax year
- Now withdraw the amount you deposited again
- You’ll now be able to redeposit that amount because you can replenish what you withdraw
For example: let’s say I have £5k of my allowance left and £15k deposited. So I deposit £5k before the tax year ends.
When the new tax year starts, I withdraw £5k.
My new ISA allowance is £25k because of the new £20k allowance and the £5k I’m able to replenish.
Multiple ISAs: Rules and Regulations
Now that we understand what an ISA is and how it works, let’s dive into whether you can have more than one ISA.
Opening Multiple ISAs in the Same Tax Year
Opening multiple ISAs in the same tax year can be beneficial for many reasons. For example, you may want to spread your savings across different types of ISAs to diversify your portfolio and minimize risk. It’s important to note that you need to be careful not to exceed the annual allowance of £20,000. This allowance is the total amount you can contribute to all your ISAs combined in a single tax year.
For example, if you open a cash ISA and contribute £10,000 to it, you can still contribute another £10,000 to a stocks and shares ISA in the same tax year. However, if you exceed the annual allowance, you may be subject to penalties and fees.
Transferring Funds Between ISAs
Transferring funds between different types of ISAs can be a smart move if you want to take advantage of higher interest rates or investment opportunities. However, you need to follow the rules and regulations set out by the provider. This includes minimum transfer amounts and transfer fees, which can vary depending on the ISA provider.
It’s also important to note that you can only transfer funds from previous tax years’ ISAs. You cannot transfer funds from an ISA that you have contributed to in the current tax year.
ISA Contributions and Withdrawals
Contributing and withdrawing from multiple ISAs is allowed, but you need to remember that the overall annual allowance of £20,000 still applies. This means that the total amount you contribute to all your ISAs combined cannot exceed £20,000 in a single tax year.
For example, if you contribute £15,000 to a cash ISA, you can only contribute £5,000 to a lifetime ISA in the same tax year. Additionally, if you withdraw money from an ISA, you cannot replace it unless it’s within the same tax year.
It’s also important to note that some ISAs may have penalties or fees for early withdrawals. Make sure to read the terms and conditions carefully before making any contributions or withdrawals.
In summary, opening and contributing to multiple ISAs in the same tax year is allowed, but you need to be careful not to exceed the annual allowance of £20,000. Transferring funds between different types of ISAs is also allowed, but you need to follow the rules and regulations set out by the provider. Lastly, while contributing and withdrawing from multiple ISAs is allowed, you need to remember that the overall annual allowance of £20,000 still applies, and some ISAs may have penalties or fees for early withdrawals.
Can I Open More Than One Stocks And Shares ISA In One Year?
Benefits of Having Multiple ISAs
Now that we’ve covered the rules and regulations of having multiple ISAs, let’s look at the potential benefits.
Diversifying Your Investments
By having multiple ISAs, you can diversify your investments and reduce your risk. For example, you could have a cash ISA for short-term savings, a stocks and shares ISA for long-term investments, and a lifetime ISA for retirement or a first home. This way, you’re not relying on one investment to provide all your returns.
Having a diversified investment portfolio is crucial to minimize risk and maximize returns. By spreading your investments across different ISAs, you’re reducing your exposure to any one type of investment. This can help protect your savings from market volatility and economic downturns.
For instance, if you only had a stocks and shares ISA and the stock market crashed, you could potentially lose a significant amount of money. However, if you had a cash ISA and a lifetime ISA, you would still have those investments to fall back on (assuming your lifetime ISA wasn’t invested in stocks).
Maximising Tax-Free Savings
By having multiple ISAs, you can maximize your tax-free savings up to the annual allowance of £20,000. This means you can increase your savings without paying any tax on the interest or gains you make.
For example, if you have a cash ISA and a stocks and shares ISA, you can contribute up to £10,000 to each account and receive tax-free interest and gains on both. This can help you grow your savings faster and reach your financial goals sooner.
Furthermore, if you have a spouse or partner, they can also have their own set of ISAs. This means you can potentially double your tax-free savings each year.
Flexibility in Financial Planning
Having multiple ISAs allows you to be more flexible in your financial planning. You can allocate your savings into different ISAs based on your financial goals and needs. This means you can save for a variety of short-term and long-term objectives without compromising on your overall savings.
For instance, if you’re saving for a down payment on a house, you could put money into a lifetime ISA. If you’re saving for a vacation, you could put money into a cash ISA. And if you’re saving for retirement, you could put money into a stocks and shares ISA.
Having multiple ISAs also allows you to take advantage of different interest rates, investment options, and withdrawal rules. This means you can tailor your savings strategy to your unique financial situation and goals.
In conclusion, having multiple ISAs can provide many benefits, including diversifying your investments, maximizing tax-free savings, and flexibility in financial planning. Consider opening multiple ISAs to take advantage of these benefits and reach your financial goals sooner.
Potential Drawbacks of Multiple ISAs
While having multiple ISAs has its benefits, there are also potential drawbacks to consider. Here are some additional details on the potential drawbacks:
Managing Multiple Accounts
Having multiple ISAs means you need to manage and keep track of several accounts, which could be overwhelming and time-consuming. It’s essential to keep on top of your contributions and check for any fees or charges.
One way to manage multiple ISAs is to set up a system to keep track of your contributions and withdrawals. You can use a spreadsheet or a budgeting app to monitor your accounts and ensure that you’re not exceeding your annual contribution limits. It’s also important to keep an eye on any fees or charges associated with each account. Some providers may charge for account maintenance, transfer fees, or early withdrawal penalties, so be sure to read the terms and conditions carefully.
Overlapping Investment Strategies
There’s a risk of overlapping investment strategies, especially if you have a stocks and shares ISA and innovative finance ISA. It’s crucial to diversify your investments, but you also need to avoid investing in the same companies or sectors.
One way to avoid overlapping investments is to research and choose different investment options for each ISA. For example, you could invest in stocks and shares in one ISA and peer-to-peer lending in another. It’s also important to regularly review your investments and rebalance your portfolio if necessary.
Fees and Charges
Each ISA provider may have different fees and charges that could eat into your returns. It’s crucial to compare providers, check the fees and charges, and consider whether it’s worth having multiple ISAs or consolidating into one account.
Before opening multiple ISAs, it’s important to research and compare providers to find the best option for your needs. You should consider the fees and charges associated with each account, as well as the investment options available. It may be more cost-effective to consolidate your ISAs into one account with a provider that offers lower fees and a wider range of investment options.
Overall, having multiple ISAs can offer flexibility and diversification, but it’s important to weigh the potential drawbacks and carefully manage your accounts to maximize your returns.
While it is possible to have more than one ISA, the rules and regulations need to be followed. There are benefits to having multiple ISAs, such as diversifying your investments and maximizing tax-free savings. However, there are also potential drawbacks, such as managing multiple accounts and paying fees or charges. Ultimately, whether you should have more than one ISA depends on your financial goals and needs.