It is easy to withdraw funds from your ISAs if you need them.
However, it used to be that once you had put money into your ISAs, you could only get it out again if you were prepared to sacrifice its tax-free status. You could pay the cash that you needed for an emergency back in – but it would count against your Annual Allowance.
Some ISAs are now flexible. If you withdraw from one, you can put it back into the same account without affecting your allowance – as long as the money is replaced within the same tax year.
You can only put up to £20,000 in your ISAs each year. Under the old rules if you take money out of an ISA and replace it, the money you put back counts against your allowance for the tax year.
If you had already paid in up to the £20,000 limit you wouldn't be allowed to put anything more back in.
The rules were changed in April 2016. Providers were allowed to make their ISAs flexible. With a flexible ISA, you can enjoy more choice as to how you use your savings. You can transfer money in and out of an ISA without this counting towards your annual tax-free allowance, as long as the funds are replaced within the same tax year, which ends at midnight on 5th April.
It means you could withdraw tax-free money, use it elsewhere, then replace it before the end of the tax year and still keep it safe from the taxman – although of course you will miss out on the interest or other returns earned when the money was not on deposit.
You can take money out of a flexible ISA at any point during a tax year and return it in the same tax year, without reducing your current year's allowance.
So, if you had £45,000 in a flexible ISA, with £30,000 from previous years and £10,000 that you put in during the current tax year, you could still put in another £10,000 before you reached your annual allowance.
If you withdraw £5,000 - to deal with some unexpected costs perhaps - you can pay it back in before the end of the tax year. That means you can still pay in another £10,000, to take full advantage of your £20,000 allowance.
Flexibility is a good idea if you want to have freedom to use your money in the way that suits you. But not all ISAs offer flexibility. The government’s rules allow individual providers to decide whether they make their ISAs flexible or not.
Many do – but some prefer to avoid the extra complication and administrative costs of offering flexibility.
Some do offer it, but place restrictions on how you can use it. Many don’t allow flexibility on their fixed rate Cash ISAs – and even if they do offer a flexible fixed rate Cash ISA you will have to pay an interest penalty for early withdrawal.
Some types of ISA are not flexible. Junior ISAs, Help to Buy ISAs and Lifetime ISAs all have restrictions, and cannot offer any withdrawals except under the set rules.
Stocks and Shares ISAs can offer limited flexibility. Most hold part of your funds as cash, and can let you withdraw and repay it, but the part that is held as shares, bonds, funds or other investments cannot be used in the same way.
That leaves Cash ISAs, and Innovative Finance ISAs. These can be flexible, and IF ISAs from RateSetter include easy flexibility as part of their list of benefits.
Flexibility means that you can dip into your ISA account as you need to, and you can call on money you contributed in previous years if you follow the rules.
If your ISA is funded just with money from this tax year, you can withdraw what you put in, if you replace it by the end of the tax year.
If you have an ISA that only contains cash from previous tax years, you can take out as much as you need and put it back. As long as you do it all in the same tax year, you won't use any of the current year's allowance. You can pay in up to £20,000.
If you have an ISA with money from previous tax years which you have also put money into this year and withdraw more than you’ve paid in this year you create what is seen as a ‘flexible allowance’. So, if you have £40,000 in a Cash ISA, made up of £35,000 from previous tax years and £5,000 deposited in the current tax year it leaves £15,000 from this year’s allowance. If you withdraw £10,000 from your ISA and repay it – along with the remaining £15,000 allowance - you could put in a total of £25,000 in this tax year.
Under flexibility rules you must replace the money in the same ISA account you took it from, but there are two important exceptions.
If you withdraw all your cash, and your account is closed as a result, you can open a new Cash ISA to repay it into – but you can only do this once per tax year.
If you withdraw your current year's cash from one type of Flexible ISA, you can repay it in another type. This means that you can withdraw from a Cash ISA or the cash component of a Stocks and Shares ISA, and repay it into an Innovative Finance ISA.
At RateSetter, our IF ISA is flexible, and accepts payments transferred in from other ISAs.
Please note that tax treatment depends on individual circumstances and may be subject to change in the future. Capital at risk. No FSCS protection.