Can You Withdraw Money From an ISA?

An Individual Savings Account (ISA) in the United Kingdom offers a tax-efficient way to save and invest money. Funds held within an ISA grow free from UK Income Tax and Capital Gains Tax. This tax-free wrapper allows savers to accumulate wealth without the burden of annual tax assessments on their returns. While money can generally be withdrawn from an ISA, the specific rules and potential implications vary significantly depending on the type of ISA held.

Understanding Flexible ISAs

Some ISA providers offer a “flexible ISA,” which provides enhanced control over your savings. The primary characteristic of a flexible ISA is the ability to withdraw money and replace it within the same tax year without affecting your annual ISA allowance. The UK tax year runs from April 6 to April 5 of the following year.

For example, if you deposit £10,000 into a flexible ISA and later withdraw £2,000 within the same tax year, you can re-deposit that £2,000 without impacting your annual allowance. You would still have your full annual ISA allowance, which is currently £20,000, available for further contributions. This allows individuals to temporarily access funds for short-term needs without losing their valuable tax-free savings capacity. Not all ISA providers offer this flexibility, so confirm this feature with your provider before making withdrawals.

Withdrawing from Other ISA Types

Many ISAs operate under different withdrawal rules. For these non-flexible ISAs, any money withdrawn permanently reduces your ISA allowance for that tax year. If you later decide to re-deposit the withdrawn funds, these new contributions will count towards your current year’s annual ISA allowance, not as a replacement of a previous withdrawal.

Consider a scenario where you have a non-flexible ISA and have contributed £15,000 of your £20,000 annual allowance. If you withdraw £5,000 from this account, your available allowance for further tax-free contributions for that year does not increase. Should you wish to put the £5,000 back, it would then be considered a new subscription and would further utilize your remaining allowance. Exceeding the annual ISA allowance is not permitted. Once money is withdrawn from a non-flexible ISA, it loses its tax-free status unless it is re-deposited within the current year’s allowance.

Specific Rules for Lifetime and Junior ISAs

Lifetime ISAs (LISAs) and Junior ISAs (JISAs) have distinct withdrawal rules due to their specific purposes. A Lifetime ISA is designed to help individuals aged 18 to 39 save for their first home or for retirement from age 60. You can contribute up to £4,000 each tax year into a LISA, receiving a 25% government bonus on these contributions, up to £1,000 annually. This £4,000 limit counts towards your overall annual ISA allowance.

Withdrawals from a Lifetime ISA are penalty-free if they are used for a qualifying first home purchase (for properties costing £450,000 or less, after the LISA has been open for at least 12 months) or when the account holder reaches age 60. However, if funds are withdrawn for any other reason before age 60, a 25% government withdrawal charge is applied to the amount withdrawn. This charge recovers the government bonus and also deducts a portion of your original savings, potentially leaving you with less money than you initially contributed. For instance, if you withdraw £1,000 in a non-qualifying scenario, the 25% charge would be £250, meaning you only receive £750.

Junior ISAs (JISAs) are long-term savings accounts for children, with funds generally locked in until the child turns 18. The annual allowance for a JISA is £9,000, separate from the adult ISA allowance. Money contributed to a JISA belongs to the child and cannot be accessed by anyone, including the parents or guardians, before the child’s 18th birthday. The only exceptions for early access are in very limited circumstances, such as the child being diagnosed with a terminal illness. When the child reaches 18, the JISA automatically converts into an adult ISA, at which point the now-adult can access the funds freely.