Cash ISAs have become flexible
How it works and which banks are doing it
Many cash ISAs are now flexible. If your bank offers them, and you withdraw from one, you can put it back into the same account in the same tax year without affecting your allowance. It works on money in old cash ISAs and cash you've deposited this tax year.
What is a flexible ISA?
It's a way some cash ISAs work. In a nutshell, where your ISA is flexible...
You can take money out of a cash ISA at any point, and return it in the same tax year (by 5 April), without it reducing your current year's allowance, which is £20,000.
An example helps to explain it:
Tom has £40,000 in his cash ISA which is made up of £35,000 from previous years and £5,000 from money deposited in the current tax year, meaning he can still put £15,000 in of this year's allowance. If he withdraws £10,000 he can put in a further £25,000 in this tax year: the £10,000 he took out, plus the remaining £15,000 allowance.
In contrast, with a non-flexible ISA, if you take money out of an ISA and replace it, the money you put back reduces your allowance for the tax year in which you replenish it. If you've already hit the limit you wouldn't be allowed to put anything more back in.
Importantly, flexible ISAs are 'flexible' automatically – you don't need to do anything. Flexibility can apply to both variable and fixed rate cash ISAs, though some providers that allow it don't offer flexibility on all their products. See below for the list of banks and building societies operating flexible cash ISAs.
There are two further key points to understand about flexible ISAs.
It's optional, providers don't have to offer flexibility – it's a function of some ISAs. The rules state it's up to individual providers whether they make their ISAs flexible or not, like how they can choose whether to allow transfers of past years' ISA cash. Even among those that allow it, some don't allow flexibility on their fixed rate ISAs (if a fixed ISA is flexible you still have to pay the interest penalty for early withdrawal). See below for the list of banks and building societies operating flexible cash ISAs.
It's not just cash ISAs that can be flexible. Innovative finance ISAs (peer-to-peer savings in an ISA wrapper) and cash held within a stocks and shares ISA can also be flexible. There are certain kinds of ISAs that can't be flexible – these are junior ISAs, Help to Buy ISAs, Lifetime ISAs and any element of a stocks and shares ISA that is NOT cash, eg, shares, bonds or funds.
How flexibility works in practice
This depends on whether money in your ISA is from new or old tax years (and if you have more than one ISA, the following will work on all of them)...
If you've an ISA just with cash from previous tax years. It's simple. Whatever you withdraw you can replace into the same account. As long as it's all in the same tax year, it'll count as replacing the cash and won't use any of the current year's allowance.
If you've an ISA just with money from this tax year. If you withdraw, as long as you replace it by the end of the tax year (5 April) it won't count towards this year's allowance. Imagine Bob has put £10,000 in a cash ISA, he can still put another £10,000 in this tax year. If he takes out £5,000 he can put in £15,000 in the current tax year (the £10,000 left of his allowance plus the £5,000 he took out).
If you've an ISA with money from previous tax years AND this tax year. It's more complex here. Withdrawals are first treated as coming from the current tax year's allowance. If you withdraw more than you've put in this year that surplus is treated as being from previous years. When replacing that cash, this is turned on its head. Money put back is first treated as replenishing previous years and, if all is replaced, then the current year. Again, this must all be replaced in the same year as it was taken out.
Another key rule is you must replace the money in the same ISA account you took it out from, with two exceptions.
If a full withdrawal results in the automatic closure of your account you can open a second cash ISA you can put money into (but you can only do this once per tax year).
- Remember, flexibility works on three types of ISAs: cash ISAs, innovative finance ISAs and cash held in a stocks and shares ISA. If you withdraw current year's cash from one type, you are allowed to replace it in another type, eg, withdraw from a cash ISA, replace in an innovative finance ISA.
Flexible ISA providers
It's up to each bank and building society whether to operate flexible ISAs. Here's which of the major firms will and won't allow it.
|Bank of Scotland||Yes, but only on variable-rate ISAs|
|Charter Savings Bank||No|
|Clydesdale Bank/Yorkshire Bank||Yes, but only on its Flexi Cash ISA|
|Coventry Building Society||Yes, but only on its Easy Access ISA|
|Halifax||Yes, but only on its ISA Saver Variable|
|Leeds Building Society||No|
|Newcastle Building Society||Yes|
|Principality Building Society||Yes, but only on variable-rate ISAs|
|Skipton Building Society||Yes|
|Tesco Bank||Yes, but only on its Instant Access Cash ISA|
|Virgin Money||Yes, but only on easy-access ISAs|
Play the system to max interest and keep ISA benefits
Taking this to its extreme, there's a nifty trick you could use to keep your money tax-free forever in an ISA while getting a higher interest rate for most of the year.
Let's say you have £50,000 in flexible ISAs, but others accounts pay higher interest that you want to take advantage of, and you don't want to lose your ability to keep £50,000 tax-free year after year as you can in a cash ISA (see Is the cash ISA worth it?). This point is far more relevant now that the personal savings allowance means you can earn up to £1,000 in interest in non-ISA savings accounts each financial year tax-free.
- At the start of the new tax year – so from 6 April – withdraw the ISA cash.
- Put it in (several) high interest accounts (see our Top Savings guide for the best deals).
- Before 5 April the following year just put it back in the ISA to keep your tax protection.
- Repeat the process again and again.
This means your money would be earning more interest for most of the year, whilst still keeping the long-term benefits of an ISA.
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