The case for flexible Isas

  • Describe how flexible Isas work
  • Identify the advantages of flexibility
  • Explain when flexible Isas are not flexible
The case for flexible Isas

Isas have been with us in some form since 1999, and while the core principles of the tax wrapper remain the same, there have been a number of modifications and even new types of account introduced in the past 22 years.

In the 2019-20 tax year, around 13m adult Isas received subscriptions totalling £75bn. (Source: HMRC ISA statistics June 2021).

They are attractive to investors as they offer tax efficiency and (in most cases) easy access to savings and investments as well as one easy-to-understand annual subscription limit. The government favours them too as they cost little in terms of upfront incentives but can also be used to influence behaviours, such as supporting the purchase of a first-time home. 

An adult can subscribe up to £20,000 a year across the different types of Isa offered, with the Lifetime Isa having its own yearly payment limit of £4,000 for those who are eligible.

While there are four types of Isas available to split the £20,000 limit between, investors can only subscribe to one of each type, per tax year.

In April 2016, the ability to operate a flexible Isa was introduced as an ‘add-on’ to the adult Isa framework. This article explains what a flexible Isa is, gives examples of how the flexibility works in practice and offers a discussion on which clients and investors could make the best use of it.

What is a flexible Isa?

The terms and conditions of a flexible Isa allow investors to replace (all or part of) the cash they have withdrawn without the replacement counting towards their annual subscription limit.

Once the value of the withdrawal has been replaced, any further subscriptions will then begin to count towards the annual subscription limit.

As an example: 

Clare subscribed £20,000 to her Isa in May 2021. It is now November 2021 and she wishes to make a withdrawal of £5,000.

Under normal Isa rules, any cash she withdraws from the Isa could not be paid back in as she has already used her annual subscription. However, under flexible Isa terms and conditions, Clare could replace up to the amount withdrawn (£5,000) in the same tax year without breaching her annual subscription limit.

Offering Isa flexibility is optional for Isa managers. However, it is not available for Junior Isas or Lifetime Isas. 

Where the terms and conditions of an Isa offer flexibility, the Isa manager should put a ‘flag’ on the annual return of information to indicate this. The flag should be used regardless of whether the investor has used the flexibility.

Flexible Isa withdrawals

The investor can only make a withdrawal under flexibility from a cash Isa, or from cash held in a stocks and shares or Innovative Finance Isa. This could be the cash proceeds from the sale of any investments held.

Flexible Isa withdrawals are treated as being made from current year subscriptions first, followed by any previous year funds. 

If income is being paid out from a flexible Isa directly to the investor (either on the instruction of the investor or as part of the account terms), this will count as a withdrawal that can be replaced without counting towards the subscription limit.

However, there are some types of cash payments that will not count as flexible withdrawals, even when made from a flexible Isa. These include money removed to cover fees and charges, or money removed by HM Revenue & Customs to cover a tax debt or via a court order.