There are 4 different types of ISA - cash ISAs, stocks and shares ISAs, innovative finance ISAs and lifetime ISAs. For each of these types, there are ‘flexible’ and ‘non-flexible’ versions.
In a given tax year, there is no limit to how many ISAs you can open as a UK resident. The annual ISA limit dictates how much you save in total per year, across all of your ISAs, and it’s perfectly acceptable to split this between a cash ISA and a stocks and shares ISA, for example.
So - where exactly does the flexible ISA come in? What does it mean for an ISA to be flexible? And what are the limitations that UK savers should be aware of?
What is a flexible ISA?
Until recently, withdrawing money from an ISA would never replenish your annual allowance (which in the 2024/2025 tax year is £20,000).
With a standard ISA, money you pay in instantly counts towards this limit. Let’s say you pay in the full £20,000 early in the tax year in April. A little later, in July, you decide to take a holiday and withdraw some cash from your ISA to pay for it.
Come September, you’re well rested and have saved some cash again. However, you’re not able to put it back into your ISA because you already used up 100% of your allowance for this tax year. That means that you may need to declare any interest or dividends you earn on your savings to HMRC, and depending on how much you make in income from these assets, you may also need to pay extra tax. Remember that tax is always subject to personal circumstances, so if you’re unsure, seek advice from a professional.
A flexible ISA gets around this issue. In this scenario, with a flexible ISA product you’d have been able to withdraw the money you needed for your summer holiday and then pay into the ISA again once you’d build up some savings later in the year. You just have to make sure the net amount paid into the ISA over the tax year stays under the government limit.
Do all ISA providers offer flexibility?
No, far from it.
ISA flexibility is a relatively new feature. All ISA products are offered through individual banks and other licensed non-bank platforms - which means that different products may have slightly different features and rules. You’ll need to check with your provider to learn if you’re able to take advantage of this feature.
If your provider does offer flexibility, be sure to read on. If you hold multiple ISAs, or you withdraw more than your annual contribution so far, things are not always as simple as they might seem…
Can I move money between flexible ISAs?
It depends.
The annual ISA limit set by the government is shared between ISAs, meaning you can contribute a total of £20,000 across the ISAs you hold. You might choose to split it between a Cash ISA and a Stocks & Shares ISA, for example.
But while the limit is shared across ISA types, the flexibility is not. For example, if you withdraw £5,000 from your flexible Cash ISA then deposit that money into your Stocks & Shares ISA, your total ISA allowance will not be replenished. That £5,000 you withdraw can only be deposited back into the same Cash ISA from which you withdrew it.
In this scenario, the only way to move money between your ISAs without affecting your total allowance is to carry out an ISA transfer. There are restrictions on what you can transfer from a lifetime or junior ISA, and not all asset types can be transferred from an innovative finance ISA. For Cash ISAs, it’s possible to instruct your provider to move the assets between ISAs, or to another ISA provider altogether. The same is true of Stocks & Shares ISAs, although to move the balance to a Cash ISA you’d of course need to sell your positions.
To switch, contact the ISA provider you want to move to, and ask for an ISA transfer form. They’ll help you move your money and set up your new ISA. Don’t forget that some providers may charge you to move assets between ISAs, so look out for any fees or restrictions.
Can I carry over my ISA allowance from previous years?
In short, no. But flexible ISAs do enable you to utilise your allowance from previous years in several specific ways.
If your flexible ISA only contains money you’ve put in during previous tax years (i.e. you haven’t made any deposits in the current tax year), then any money you withdraw can be replaced in the same ISA during the same tax year, without affecting your current year’s £20,000 allowance.
For example, if you withdrew £5,000 from last tax year’s contributions, then you could put the same £5,000 back into the same ISA later that tax year, and it won’t affect how much you can contribute this year. With a non-flexible ISA, that deposit of £5,000 later in the tax year would use up some of your allowance for the current tax year.
What about if you’ve made contributions in previous years and in the current year? When you take money out, it’s considered to come from the current year’s contributions first. If you take out more than you’ve contributed this year, the rest of the withdrawal is counted as coming from previous years. Replacing funds works in reverse: when you replace the money in the same tax year, it first replenishes your previous years’ funds and then this year’s contributions.
However, none of this changes the fact that any unused balance from the current tax year is lost once you reach the end of the tax year in April. This is the same for all ISAs, flexible or not.
Key point: You must replace the money into the same ISA account and within the same tax year the withdrawal was made for this to work.
Do I need a flexible ISA?
A flexible ISA can be a good choice for people who want to save or invest up to £20,000 every tax year, while maintaining maximum flexibility to withdraw funds if necessary. You’ll need to familiarise yourself with your own provider's rules, but the option to withdraw and repay without losing your allowance is reassuring if you’re not certain of your cash flow, or if unexpected or short term costs arise.
Disclaimer
When you invest, your capital is at risk. Terms apply. The tax information provided here is of a general nature, and is not a substitute for specific advice in your own circumstances. Seek guidance if needed.
Charlotte is a Communications Manager at Lightyear. She's been sharing news and insights about the finance industry for over five years. At Lightyear she writes content about: product developments on the platform; data, research and news within the investing space; investing instruments and tools; and how individuals and businesses can grow their wealth.
