FLEXIBILITY AND ISAS: CURRENT RULES AND PLANNING OPPORTUNITIES

In the Chancellor’s recent Mansion House speech, Rachel Reeves confirmed that the ISA allowance will remain unchanged for now, following pushback from building societies and other industry stakeholders. The Chancellor did, however, reaffirm the government’s appetite for ISA reform, especially around improving returns for savers. As such, changes to the ISA landscape remain likely in the months ahead.

Flexible ISAs and the current framework

With the current rules maintained, investors continue to benefit from a total ISA allowance of £20,000 per tax year, which can be allocated across a combination of different ISAs such as Cash ISAs, Stocks & Shares ISAs, Lifetime ISAs, and Innovative Finance ISAs. (Note: Lifetime ISAs are subject to a separate annual contribution limit of £4,000).

Some providers, including Transact, offer Flexible ISAs. These allow investors to withdraw and replace funds within the same tax year without impacting their annual allowance, For example:

• £5,000 is deposited into a flexible ISA within the 2025/26 tax year.
• £2,500 is withdrawn later in the same tax year.
• The investor can still contribute up to £17,500 (£15,000 remaining allowance + £2,500 withdrawn).

It is crucial to note, however, that not all ISA providers offer this flexibility, and terms can vary. If the ISA is not flexible, the remaining allowance would be limited to £15,000, and the withdrawn amount could not be replaced.

This flexibility provides valuable liquidity while preserving tax-efficient savings opportunities for investors, for example:

• Emergency Access: Flexible ISAs provide a safety net, allowing clients to withdraw funds for unexpected expenses (e.g., car repairs, urgent home maintenance) without permanently diminishing their tax-free allowance if they can replace the funds later in the same tax year. This offers peace of mind.
• Bridging Cash Flow Gaps: For self-employed individuals or those with irregular income, a flexible ISA can act as a short-term cash buffer, enabling them to draw funds and repay them when invoices are paid or bonuses arrive, without penalising their long-term ISA strategy.
• Optimising Annual Allowance: Clients can effectively ‘max out’ their ISA allowance early in the tax year, knowing they have the option to withdraw and replace funds if needed, rather than holding back contributions due to liquidity concerns.

Previous year funds and further subscription considerations

Withdrawals from previous year’s ISA subscriptions can also be replaced, but only with the same ISA manager from which the funds were withdrawn. As with current year subscriptions, the replacement subscription must also be made within the same tax year.

The ordering of withdrawals and replacement subscriptions is:

• Withdrawal Order: Funds withdrawn are always treated as coming from current year subscriptions first, then previous years’ subscriptions.
• Replacement Order: Funds replaced are always treated as replenishing previous years’ withdrawals first, then current year withdrawals.

Transfer considerations

When transferring an ISA, a ceding Flexible ISA manager will report the net subscription amount for the current tax year to the receiving provider. However, if the ISA being transferred is not flexible, clients should, where possible, avoid making withdrawals prior to the transfer, as any replacement subscription allowance will be lost.

Furthermore, if previous years’ withdrawals have not been replaced before a transfer, the ability to replace those specific funds tax-free will generally be lost, even if the new provider offers flexibility. This is because the flexible allowance for previous years’ withdrawals is tied to the original ISA account. In cases where withdrawals from previous years’ subscriptions have been made, these should be replaced prior to transfer.

What about in specie withdrawals?

Only cash withdrawals qualify for replacement under flexible ISA rules. In specie withdrawals do not qualify and cannot be replaced.

What about Lifetime ISAs?

Lifetime ISAs are not flexible. Additionally, withdrawals outside permitted circumstances (e.g., first home purchase or retirement from age 60) are subject to a 25% government withdrawal charge.

Can adviser and discretionary investment manager fees (DIM) be replaced?

Transact’s Cash and Stocks & Shares ISAs allow for adviser/DIM fees taken from these facilities to be replaced within the same tax year without counting towards the annual subscription limit.

If you have any questions, please feel free to contact the Technical Services team.

All information is based on our understanding and interpretation of applicable law and regulation.