Happy birthday ISA: How 25 years of tax-efficient investing has helped you to grow your wealth

A birthday cake with the words Happy Birthday in candles.

1999 was the year that gave the world the Euro, Family Guy, The Matrix, ‘I Want It That Way’ by Backstreet Boys, and, for Brits, the Individual Savings Account, better known as the ISA.

ISAs are tax-efficient savings accounts that save UK taxpayers billions every year.

The ISA allowance for the 2024/25 tax year is £20,000. Money Week reports that in 2023/24, ISAs saved UK taxpayers around £6.7 billion in tax. An individual higher-rate taxpayer who used their full allowance in a top-paying Cash ISA saved £421.60.

The Treasury continually reviews and reforms the types of ISAs on offer and their annual limits, and they have changed a lot in the 25 years since their inception.

So, as this year marks the quarter-century anniversary of their creation, read on to find out about the history of the ISA and what the future could hold for them.

ISAs replaced other similar tax-efficient schemes

Former UK prime minister Gordon Brown introduced ISAs in 1999 during his tenure as chancellor.

He introduced ISAs to consolidate and simplify similar tax-efficient schemes. The aim was to encourage and incentivise saving and investing among individuals, while also providing investment funds for businesses.

Prior to the introduction of the ISA, UK savers had other tax-efficient options available.

For example, Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs) were forerunners to Stocks and Shares ISAs and Cash ISAs respectively. And Junior ISAs, introduced in 2011, replaced the Child Trust Fund.

ISAs simplified these earlier schemes and made it easier for you to open accounts and enjoy tax-efficient savings.

There are now five types of ISA, but there used to be others

There were previously other types of ISA that have since been replaced or abolished over the years.

Old types of ISAs included Mini ISAs, Maxi ISAs, and TESSA-only ISAs.

Mini ISAs could hold cash or stocks, while Maxi ISAs could hold cash and stocks. As a UK resident aged 18 or over, you could either invest in one Maxi ISA a year or two Mini ISAs a year.

The TESSA-only ISA was solely for cash investments.

Now, there are five types of ISA:

  • Cash ISAs – A Cash ISA works like a traditional savings account, except you pay no Income Tax or Capital Gains Tax (CGT) on interest earned on your savings.
  • Stocks and Shares ISAs – A Stocks and Shares ISA lets you invest your money in a wide range of assets, and you don’t pay any tax on capital gains you make or income you earn.
  • Innovative Finance ISAs – An Innovative Finance ISA allows you to provide loans to approved individuals and businesses in return for a fixed amount of tax-free interest over a set period. The level of risk and return can be higher than other types of ISA.
  • Lifetime ISAs – A Lifetime ISA allows you to save for your first home or retirement without paying tax on your savings, up to £4,000 a year (2024/25). You will receive a 25% bonus on anything you contribute, up to a maximum of £1,000 a year. You will pay a withdrawal penalty of 25% if you withdraw funds before the age of 60 for any reason other than the deposit for your first home.
  • Junior ISAs – A Junior ISA is a tax-efficient way for you to save on behalf of a child. The child can manage the account once they reach the age of 16, but they cannot make withdrawals until they are 18. Junior ISA investments are capped at £9,000 a year and they can be held in addition to the adult ISA allowance of £20,000 (2024/25).

The ISA you opt for depends on your overall goals.

For example, a Cash ISA is ideal for short-term saving goals with minimal risk, whereas a Stocks and Shares ISA could give you the potential for higher returns over the long term.

If you’re looking to save for your first house or retirement, then a Lifetime ISA could help you along the way, or if you want to save for a child’s future, then you can invest in a Junior ISA in addition to any other ISAs you have.

You can also mix and match your ISAs and hold savings in different types and even in multiple accounts of the same type of ISA.

The ISA allowance has changed over the years

There is a limit to the amount you can pay into your ISAs each tax year.

When it first launched, the ISA allowance was just £7,000. In 1999, Brits paid £28.4 billion into 9.3 million adult ISAs.

The limit remained at £7,000 until 2009 when then chancellor Alistair Darling raised the cap to £10,200 for those aged 50 and over. He then rolled out these changes to the rest of the population at the start of the 2010/11 tax year.

Then, under the David Cameron-led Conservative government, George Osborne raised the ISA allowance to £11,520 for the 2013/14 tax year, before increasing the limit again in 2014 to £15,000.

In 2017, Philip Hammond announced that the limit would increase to £20,000, and it has stayed at this rate ever since.

However, there could be an increase in the ISA allowance if the proposed “UK” or “British” ISA goes ahead.

The rules around ISAs changed this year and there could be more changes yet to come

On the occasion of their 25th birthday, ISAs evolved again, with new rules coming into force for 2024/25.

The new rules state that you can now invest in multiple ISAs of the same type every year and make partial transfers between ISA providers.

This should make it simpler to switch providers, and it means you can also shop around for the best rates, giving you more control over the money you have invested in ISAs.

In the 2024 Spring Budget, UK chancellor Jeremy Hunt announced the proposal for a new British ISA, also known as the “UK ISA”.

The British ISA is to remain under consultation until 6 June 2024, while the Treasury and the City design plans for its access and implementation.

If the British ISA is greenlit, you will be able to invest an additional £5,000 a year into UK equities, with the same tax advantages as the current ISAs. This means that, if the British ISA is to go ahead, the annual ISA allowance could increase to £25,000.

Although the consultation period is set to end in June, there has been no further word as to when you might be able to open one.

Get in touch

To find out more about how your finances could benefit from the tax-efficient savings offered by ISAs, get in touch.

Email info@blueskyifas.co.uk or call us on 01189 876655.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.