Flexible ISAs: What they are and how they work

What is a flexible ISA?

A flexible ISA is an ISA that lets you withdraw funds and pay them back into your ISA account in the same tax year, without affecting your annual ISA allowance. This can apply to cash ISAs, stocks and shares ISAs and innovative finance ISAs, but not all providers offer flexible ISAs so you’ll need to check.

A flexible ISA means you won’t be penalised if you access some of your ISA funds.

How does a flexible ISA work?

Let’s say you’ve paid £20,000 into a flexible cash ISA, using your full ISA allowance for that year. In the same tax year, you decide to withdraw £10,000. Because the ISA is flexible, the withdrawal doesn’t affect your annual allowance and you can repay the £10,000 before the end of the tax year.

Note that you must repay it into the same ISA account you took it out of, although you can withdraw from a flexible cash ISA and replace it in a flexible stocks and shares or innovative finance ISA instead.

By contrast, if the ISA was not flexible and you’d paid in £20,000 but withdrawn £10,000, you wouldn’t be able to repay the £10,000 as this would mean you’d have exceeded your annual allowance.

Do I need a flexible ISA?

Ultimately, whether you need a flexible ISA is up to you. But if you think you could get close to using up your £20,000 annual ISA allowance and you plan to make withdrawals, it’s well worth choosing a flexible ISA.

On the other hand, if you know you won’t get close to reaching your annual ISA limit or you don’t plan to make any withdrawals, choosing a flexible ISA won’t be so important.

Pros and cons of flexible ISAs

Bottom line

Choosing a flexible ISA could be a great option if you’re worried that you will get close to using your full £20,000 ISA allowance and might need to make some withdrawals. Just remember that not all providers offer flexible ISAs and it’s important to check how competitive the account is before making a decision.

Frequently asked questions

• Can I transfer my ISA if I am using my flexible ISA allowance?

  If you transfer all of your ISA to another provider, you won’t be able to repay the funds you have withdrawn under flexible ISA rules. If you only transfer part of your ISA, you may be able to replace the withdrawn funds in your original ISA, but not the one you are transferring to.

• Is an ISA worth it?

  Thanks to the personal savings allowance, all basic rate taxpayers can now earn up to £1,000 a year tax-free on any interest from savings and current accounts. Higher rate taxpayers can earn up to £500, while additional rate taxpayers have no personal savings allowance.

  This means that if you’re a basic or higher rate taxpayer, you might feel it’s not worth investing in a tax-efficient ISA. However, bear in mind that while interest rates are rising, those that have a lot in savings could get closer to reaching their personal savings allowance limit – in which case, saving in an ISA could make good financial sense.