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An introduction to Isas

Individual Savings Accounts, universally known as ISAs, began life as relatively simple savings plans in 1999, but over the past 25 years the rules surrounding them have become ever more complex – and may yet become more so. While there have been calls to make the regime simpler and more accessible, until recently the government had shown relatively little interest in ISAs. Then in the Autumn 2023 Statement the then Chancellor simplified some of the administrative complexities but also removed one investment opportunity. Subsequently, in the March 2024 Budget, the Treasury launched a consultation on a new ‘UK ISA’ which, as its name suggests, would be focused on UK investment. However, in the Autumn Budget 2024 Rachel Reeves, the new Chancellor, announced that she would not pursue the idea and, at the same time, froze ISA subscription limits at their current levels through to 2029/30.

The government’s website says there are currently only four categories of ISA – cash ISAs, stocks and shares ISAs, innovative finance ISAs, and Lifetime ISAs – but variants exist for specific investment needs.

This guide will explain how the main variants work, in order of their original launch date.

The Guide covers the following topics:

• The types of ISA available 
  The ISA family includes a range of products suited for a variety of investment plans 
• The investment options 
  How you can use ISAs for cash savings, stock and shares and more
• Investment limits
  The amount you can contribute each tax year depends on the type of ISA
• How ISA investments are taxed
  How the tax privileges work in practice, for each type of ISA 

Click here to download your copy of ‘Making the most of ISAs’.

Our full range of Key Guides can be found at:
www.polestarfp.co.uk/resources/key-guides

Investors do not pay any personal tax on income or gains, but ISAs may pay unrecoverable tax on income from stocks and shares received by the ISA managers.

This publication is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this publication. The Financial Conduct Authority (FCA) does not regulate tax advice, so it is outside the investment protection rules of the Financial Services and Markets Act and the Financial Services Compensation Scheme. This publication represents our understanding of the Autumn Budget 2024 and the law and HM Revenue & Customs practice as 4 November 2024.

The latest Budget move to count pensions as part of your estate for inheritance tax (IHT) is a major change, with potentially significant consequences.

At present, most pension benefits payable on death, whether lump sums or other income, are outside the scope of IHT because they are not considered part of the deceased’s estate. However, there is an income tax charge on the beneficiaries if death occurs on or after age 75 or in certain limited cases before then. 

The Budget’s proposals, now out for consultation, would start from 6 April 2027 and see the value of nearly all pension death benefits counted as part of an estate. This would include not only drawdown funds unused at death, but also lump sum death-in-service cover provided by many employers. HMRC estimates that in 2027/28, the first tax year to apply the new rules, 10,500 estates will become liable to IHT than would have been previously. A further 38,500 estates will also pay more IHT than before. HMRC calculate that on average those estates will pay an additional £34,000 IHT, which amounts to a 20% increase.

While income tax principles are not changing, your income tax bill may alter. Income tax will continue to apply to most death benefits, but based on the amount after IHT has been deducted. The example below shows how IHT and income tax interact.

Example 1: Interaction between IHT and income tax

Richard dies at aged 80 in June 2027 with an estate of £750,000 and a pension pot valued at £200,000, which will pass with the rest of his estate to his nephew, Graeme, who is an additional rate taxpayer. The total tax bill would be:

In the example, if Richard did not have a pension pot, Graeme would receive £580,000. In other words, the £200,000 pension pot puts another £53,684 in Graeme’s hands – an effective total tax rate on the pension of 73%. The effective rate can be even higher, something which typically happens when the addition of the pension to the estate takes the value over £2 million, triggering a loss of some or all the residence nil rate band.

While aspects of the Budget proposals on the administration of the rules might be amended in response to consultation before April 2027, it is highly unlikely the principle will be abandoned. The revenue raised is projected to be nearly three times as much as from the controversial reforms to IHT business and agricultural reliefs. 

The Financial Conduct Authority does not regulate tax advice.
Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority does not regulate will writing and some forms of estate planning.
The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing.

The Budget brought inheritance tax (IHT) into the news headlines, but its impact is not well understood.  

Mark and Hannah have an estate valued at £1.25 million, including their jointly owned home worth £400,000. Like many couples, their wills leave everything to the survivor on first death and to their children on second death. What proportion of their estate would disappear in IHT under current rules once that second death occurs?

A. 8%    B. 20%    C. 24%    D. 40%

The correct answer is 8%, which may surprise you. While the headline rate of IHT is 40%, Mark and Hannah would each benefit from:

• A nil rate band of £325,000, plus
• A residence nil rate band of £175,000. 

Both nil rate bands are fully transferable to the estate of the surviving spouse, to the extent that they remain unused on first death. Thus, Mark and Hannah’s estate would have £1,000,000 of nil rate bands available at second death, leaving £250,000 to be taxed at 40%. 

The theoretical £1,000,000 of nil rate band has been in existence since April 2020 and is set to remain unchanged until April 2030, following the Autumn 2024 Budget’s two-year extension to an existing threshold freeze. The freeze, which has been in existence for the main nil rate band since April 2009, will continue the process of dragging more estates into IHT as inflation sees the value of property and other assets increase. 

The structure of IHT favours married couples and civil partners with children. In the above example, if Mark had never married and died leaving the same £1.25 million estate to his nieces and nephews, the IHT would be nearly 30% of his estate. He would only have one nil rate band and no residence nil rate band, which generally only applies to residential property gifted to children, grandchildren and other specific categories of direct descendants.

At the time of the Autumn 2024 Budget, the Office for Budget Responsibility (OBR) estimated that by 2029/30 nearly one-in-ten estates will be liable to IHT, up from a little over 5% in 2023/24. If you are concerned that your family might join the growing membership of the IHT club, start planning now. More than almost any other tax, time is a crucial element in any IHT mitigation strategy. 

Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority does not regulate tax advice or wills.

National Savings & Investments (NS&I) has been busy reducing its interest rates in recent months.  

NS&I has roots going back to 1861, when Gladstone, then Chancellor of the Exchequer, launched the Post Office Savings Bank. NS&I’s latest quarterly results show that on 30 September 2024, it held £233.9 billion on behalf of investors. That might seem like a lot of money, but it’s a relatively small amount when considering the vast budgetary hole the current government is trying to navigate between spending and revenue. The figures that came out alongside the Autumn 2024 Budget revised the 2024/25 gap – officially called the Central Government Net Cash Requirement – to £165.1 billion. Another £139.9 billion is needed to repay existing government debt which matures in 2024/25, bringing the total to over £300 billion.

In other words, the entire stock of NS&I, accumulated over 163 years, would cover the equivalent of about nine months of government financing. Viewed in terms of how much fresh cash NS&I is currently raising, its impact can be counted in days, not months. In the first six months of 2024/25, NS&I’s net inflow was £3.3 billion – four days’ worth of government financing.

Currently government bonds (gilts) account for the lion’s share (a projected £296.9 billion in 2024/25) of government financing. That makes NS&I an also-ran, picking up the public’s retail pennies rather than institutions’ warehoused pounds. Arguably, if NS&I did not exist, it would not be invented today. But it does exist, and the government would not want to see the NS&I’s £230 billion+ disappear, so it will continue to survive.

In recent months, NS&I has been cutting rates on many of its products, from Premium Bonds (prize rate now 4.0% against 4.4% in November 2024) through Income Bonds (3.44% now against 3.93% in mid-November 2024) to two-year Guaranteed Growth Bonds (3.60% now against 4.60% in early September 2024). NS&I rarely tops the rate tables, and the recent cuts have left it languishing at the point where better returns can be found from that other government borrowing route – gilts. 

If you hold NS&I investments, it is worth checking whether they still are the right home for your cash. 

The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested.

As 2025 gets under way, it is once again the time of year to start considering your tax year-end planning.   

The early months of the year are the time to undertake year-end tax planning. Unsurprisingly, the traditional drivers have been the tax year-end (Saturday 5 April 2025) and the Spring Budget. On this occasion, after last October’s blockbuster, there is no Spring Budget, although Rachel Reeves will deliver a Spring Forecast in late March. In the wake of that Autumn Budget, there is plenty to consider:

• Pension contributions: The Budget announcement that pensions will fall within the scope of inheritance tax (IHT) from 2027/28 makes the review of pension contributions slightly different from previous years. For most people, pensions remain a highly tax-efficient way of saving for retirement, but for the wealthy few unconcerned about retirement income, they are no longer the estate-planning tool of choice.
• Capital gains tax (CGT): Capital gains tax rates increased in the Budget to 24% for higher and additional rate taxpayers and 18% for other taxpayers. If you have not used your annual exemption – now just £3,000 of gains – you should consider doing so after what has been a generally good year on the world’s stock markets.
• IHT: Now is the time to use your annual exempt amount (£3,000 per tax year) for 2024/25 if you have not already done so. If you did not use your full exemption from 2023/24, you can also gift the unused element after you have exhausted this year’s exemption.
• Marriage allowances: If you or your spouse/civil partner had income below the personal allowance in 2020/21 (£12,500), you have until 5 April 2025 to claim the marriage allowance for that year (£1,250), which could produce a tax saving of up to £250. A claim can only be made if the other partner was a basic rate taxpayer (starter, basic or intermediate rate in Scotland) in that tax year. The same principle applies (with an allowance of £1,260) for 2021/22 and subsequent years onwards.
• Threshold planning: The long-term freezes that have applied to income tax allowances and many thresholds may mean you move into a higher tax band in the coming tax year. Equally you could find yourself crossing the unchanged £60,000 threshold for the high-income child benefit charge or the £100,000 threshold for personal allowance taper and loss of tax-free childcare. Among the strategies to beat the unmoving thresholds, you could bring forward income into 2024/25 (e.g., by closing an interest-paying account) or move some income-generating investments across to your (lower income) spouse or civil partner by 5 April.

It is best to seek advice before taking any action – in tax, errors can be costly and difficult to unwind. Please contact your adviser on 01252 626200 or Email office@polestarfp.com for further information. 

The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested.

The global market outlook showed an improvement for 2024 with the US achieving more than 20% returns for a second consecutive year.

A quick look at a table comparing changes across key global indices puts the UK, as represented by the FTSE 100, in a relatively poor light. Figures suggest that the government has its work cut out persuading pension funds to divert more of their capital to UK companies, rather than the locomotive that is the US stock market. However, there are nuances that a simple annual performance table misses:

• The level of dividends on the UK stock market is generally higher than in other markets. This normally does not show up in index performance tables, as most indices only measure capital growth. Add in dividends and the total return on the FTSE 100 in 2024 was a more respectable 9.7%.
• The US stock market, as measured by the S&P 500, produced another powerful performance in 2024. Much of that was due to the so-called Magnificent Seven technology shares – Amazon, Apple, Alphabet (aka Google), Meta, Microsoft, Nvidia and Tesla. Together, those seven companies account for about one third of the value of the 500-company S&P 500. The significance of the Magnificent Seven becomes apparent when an alternative version of the S&P 500 is considered which gives every company the same index weight, meaning the septet becomes just 1.4% (7/500) of the index. In 2024, that equal-weighted index grew by 10.9%, not 23.3% of the main index.
• Often overlooked in index tables is the effect of currency – indices are normally quoted in local currencies. So while the Euro Stoxx 50 appears to have outperformed the FTSE 100 in 2024, that is not the case if you are a sterling-based investor. Over the year, the euro fell 4.4% against the pound, more than enough to counter the higher euro-based index growth. There is a similar story for Japan, where the strong performance of Japanese shares was pared back by an 8.7% decline in the Japanese Yen against the pound.

One familiar lesson to draw from 2024 is that diversifying your investments across global markets makes sense – despite what the Chancellor might hope for. 

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.  
Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

The long freeze on student tuition fees in England has come to an end.

Do you know what the RPIX is? You might guess it’s related to inflation given that RPI is the Retail Prices Index. But what does the X mark? X stands for RPI excluding mortgage interest. RPIX was used as the Bank of England’s inflation target until the end of 2003 when it was replaced by the more familiar Consumer Prices Index (CPI).

However, the Office for National Statistics now says the RPI and its derivatives “do not meet the required standards for designation as National Statistics”.

Given such a pedigree, it might seem surprising that an estimate of RPIX for the first quarter of 2025 was used to determine a 3.1% increase in tuition fees for the 2025/26 academic year in England. This will raise the maximum (and near-universal fee) from £9,250 to £ 9,535. It will be the first increase in fees since 2017; it is uncertain whether the 2025 rise marks the return of annual increases.

The Department for Education’s (DfE) press release announcing the increase said, “After leaving study, student loan borrowers will not see their monthly student loan repayments increase as a result of these changes.” While that statement is factually correct, it is somewhat disingenuous. New student loans are repayable at the rate of 9% of annual income over £25,000. So while a higher tuition fee does not mean higher payments, it does mean that payments will continue for a longer period, as the debt (plus interest at RPI) is larger. Following a change introduced from 2023, the maximum loan repayment term is now 40 years, after which any outstanding amount is written off.

As well as increasing tuition fees, the DfE also raised the amount of maintenance loans – about half of which are parental means-tested – by 3.1%. This comes after a history of sub-inflation increases which means that the new loans will be up to 10% below those of 2020/21, adjusted for inflation.

If you have children or grandchildren heading to university, then planning for the financial support they will need – RPIX adjusted or otherwise – has never been more important.

Note: Scotland, Wales and Northern Ireland have their own student finance systems, but do not be surprised if that new tuition fee limit of £9,535 turns up somewhere in their versions.

A recent survey has raised questions about retirement readiness.

One of the world’s largest investment managers, BlackRock, recently published its latest review of the UK’s retirement landscape. The work was based on a survey of 1,000 savers in defined contribution (DC) pension arrangements. This is the type which now dominates private sector retirement provision, mainly through automatic enrolment workplace schemes. 

BlackRock’s four main findings were:

• 1. Generational differences in retirement readiness. Only Gen X (born 1965–1980) and pre-retirees are able to prioritise retirement saving. In contrast, Gen Z (born 1997–2013) were more concerned about enjoying life today than planning for the future. The previous generation, Millennials (born 1981–1996), felt unable to make any plans due to their current financial pressures. 
• 2. Staying on track is a concern. In response to the question ‘Do you think you are on track to allow you to have a reasonable standard of living in retirement?’, just 26% said ‘yes’, with 35% saying no and a worrying 39% in the ‘don’t know’ category – a six-year high. Even among pre-retirees, over a third were unable to give a definitive answer.
  When asked for the reason why they felt they were not on track, half said that they could not afford to save enough. A surprising 44% took the view that the State Pension would not be worth much by the time of their retirement, even though State Pensions have been uprated at least in line with prices since 1980.

• 3. Encouraging better savings behaviour is essential. Four-out-of-five agreed that putting money into a pension is the most effective way to save for retirement, while almost two-in-three thought it was the only chance they had of a decent retirement income. However, when the time came to act or to make a decision, 55% did not believe their level of pension contributions was sufficient.
• 4. The later life retirement conundrum. Over three-quarters of pre-retirees do not have a plan to move their money out of their workplace pension upon retirement. Even among those who claim to have a plan, many have not given much thought to how they will generate income in retirement.

If any of these survey responses ring a worrying bell with you, make a point to review your retirement planning now.  

The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested.

Those using the platform Booking.com to book their holidays or accommodation are being warned they could be targeted with emails or messages requesting payments from hotels who have had their account taken over by fraudsters. Between June 2023 and September 2024, Action Fraud received 532 reports from individuals, with a total of £370,000 lost.

What can financial planning help you? 

Financial planning isn’t just reserved for the especially wealthy. Whether we’re aware of it or not, all of us are on a financial planning journey and nearly all of us will want to make the most of our money and that includes putting it to good use by investing for our future selves.

A new government brings with it uncertainty. Manifesto pledges are not legally binding and ambitious plans for the country need to be funded. This has focused many people’s minds on the need for financial planning. However, keeping a watchful eye on our financial resilience (our ability to recover quickly from unexpected financial shocks) is an exercise we should all be doing on a regular basis, rather than something we only think about in times of change or stress.

Whether it’s a change in our circumstances, for example on marriage or, entering into a civil partnership, or cohabiting on starting a family, relationship breakdown, beginning to save for or to take retirement or investing to provide for our children’s education, financial planning can help everyone across all stages of their lives.

It’s hard to plan objectively for ourselves as financial decisions are often driven by emotion. We might worry that we’re not making the right choices for our family or feel nervous about making choices we’re not confident about. Nowadays, you can search for products online, but how do you know which ones will provide the right solution for you?

A financial adviser will get to know you, your circumstances and what you’d like to achieve in terms of your financial goals. Over time, they’ll be there for you as a professional trusted partner whose expertise and objectivity you can rely on.

Click here to download your copy of ‘The Financial Planning Journey ‘.

Our full range of Key Guides can be found at:
www.polestarfp.co.uk/resources/key-guides

This publication is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this publication. The Financial Conduct Authority does not regulate tax advice, so it is outside the investment protection rules of the Financial Services and Markets Act and the Financial Services Compensation Scheme. This publication represents our understanding of the law and HM Revenue & Customs practice as at 9 July 2024.