Did you know that you can build up an ISA allowance without keeping the money in it?
Well, that’s Flexible ISA in a nutshell.
Flexible ISA is a fantastic tool for business owners because it allows us to move money in and out without losing the tax-free benefits.
I will also share a clever way to create a big ISA allowance (say £100,000) without having to invest the money.
First, let’s quickly cover the basics.
How a Standard ISA works – The Basics
A typical ISA allows you to invest £20,000 every tax year. This is your £20,000 annual allowance.
Your pot grows tax-free, as long as it remains inside the ISA.
But if you take any money out, then you lose that portion of your allowance permanently.
You cannot “put them back in”.
Every deposit uses up your allowance.
To put the money back in, you either have to eat into your remaining allowance, if any or otherwise wait until next year’s reset!
Typical (Non-Flexible) ISA Example
For example, say you opened a new ISA in the new tax year and put £20,000 in it. You cannot put any more until next year, since your allowance is used. Sometime in May, you take £5,000 out of this pot.
You cannot put this £5,000 back into your ISA. You’ll have to wait until April next year to deposit any new money, by using your next year’s £20k allowance.
In other words, your ISA from year 1 can only hold £15,000 of your own money (plus any shares appreciation). That’s bad.
The problem worsens if you have built a generous allowance over the years and have to use the funds to buy a house or something. You’d lose all these years’ allowances too. Ouch!
These restrictions apply to most ISAs, which is stupid if you ask me. All ISAs should be flexible.
A Flexible ISA solves this problem. Especially for business owners and limited company directors.
What is a Flexible ISA?
With a Flexible ISA, you don’t lose the equivalent allowance if you take money out of your ISA.
You can simply put them back in as long as you do it in the same tax year.
This illustration from Paragon who offers a flexible cash ISA is very useful:
Business owner example
For example, say you want to buy a house. Over the past 3 years, you have been maxing out your ISA and have accumulated £60,000 worth of investments.
You sell your stocks and put a £60,000 deposit. You now have until the end of the current tax year (April 5th) to replenish your ISA without having to lose all your allowance!
You could get a £60,000 director’s loan from your business on April 5th (just before the tax year ends), deposit it in the ISA, withdraw it on April 6th, and pay the business back.
This would keep your allowance intact even though no money is in it.
Neat.
This is why I believe a Flexible ISA is an amazing tool for limited company owners.
But I can think of other good scenarios too.
Note that with a director's loan, there can be tax implications for both the company and the director if the loan exceeds £10,000 or if it's not paid quickly as shown above. Your company may have to charge you interest on the loan (yes, even for 1 day). Check with your accountant before going down this path.
Who is the Flexible ISA for?
The Flexible ISA is great for you if you:
- Have an unstable income pattern (business owner or self-employed)
- Plan to sell your business
- Have an offset mortgage
- Take more dividends than you need just to top-up the ISA
- Plan to claim Entrepreneur’s Relief
- Await an inheritance
- Want to buy assets not available in an ISA (e.g Bitcoin) but keep your ISA allowance
As you can see, the Flexible ISA can work well for many different groups.
I’d like to dive deeper into two use cases.
Example #1: Selling your business or claiming Entrepreneur’s Relief
If you plan to sell your business in a few years, you can take advantage of the Flexible ISA to prepare a tax shelter for the sale proceeds.
Over the years you would be building up your allowance, growing your tax-free bucket.
Each year this grows by £20,000.
Year 1: £20,000
Year 2: £40,000
Year 3: £60,000
Year 4: £80,000
In Year 5, the business is sold.
£100k can now go into the ISA in one go and keep growing tax-free.
Example #2: Stop taking more dividends just to fund the ISA
I know many business owners who take more income out of their business, so they can just fund their ISA. They don’t want to lose the annual ISA allowance, understandably so.
But at the same time, they don’t enjoy paying higher taxes since they don’t really need the money.
So they find themselves in a pickle.
What do they do? They typically draw more dividends to fund their ISA, stepping into the high-rate tax territory. So their overall income is £70k, even if they only needed £50k to live on.
Or £120k, when they only needed £100k.
A flexible ISA solves this problem too.
Instead of paying a higher dividend tax (33.75% or 39.75%) to fund your ISA, you could build a flexible ISA allowance over time, while investing through your company instead. Or just keeping the money as cash in the business.
This can result in big tax savings over time.
As a result, you can secure your new ISA allowance without having to draw extra dividends from the business at a higher tax rate.
Here you could argue that not taking the dividends means lost opportunity cost in investment returns.
Because presumably, your ISA investments will grow, whereas your company cash won’t. I hear that. But there are options such as investing through your company or putting the money in a high-yield business bank account.
Flexible ISA with an offset mortgage: The perfect match
Like two communicating vessels, an offset mortgage is a perfect companion to a flexible ISA.
An offset mortgage is one where you can keep your mortgage equity in cash in your account, while the bank only charges interest on the remaining loan amount.
The offset account benefit is that you can access the cash anytime, without costly re-mortgaging processes.
Example:
- House price £500,000
- Deposit = £200,000
- Interest 5%
You would keep the £200,000 in cash in your mortgage bank account, and only be charged interest on the remaining £300,000. You can have access to the cash anytime and grow or reduce the loan amount as you see fit.
Basically, like standard mortgages, but better, because it gives you the flexibility to use your cash.
With a Flexible ISA, an offset mortgage can work very well.
You can keep the cash in your mortgage to reduce your interest while topping up your flexible ISA just before year-end. Then a day later, you would return the cash back to your offset account.
As a result, you pay down your mortgage while using the same funds to grow your ISA allowance each year.
Offset mortgages are harder to find and potentially more expensive as choices are limited.
The Best Flexible ISAs
Most Flexible ISAs are Cash ISAs, but Flexible Stocks and Shares ISAs do exist.
Here is a list of the best flexible stocks and share ISAs for business owners:
- Vanguard Flexible ISA
- Charles Stanley Flexible stocks and shares ISA
- BestInvest flexible ISA
- Eqi stocks and shares Flexible ISA
What I like to see:
Flexible Cash ISAs are offered by many more providers, usually banks. These include Barclays, Paragon, Coventry Building Society, Tesco, Lloyds, TSB and Chip Cash ISA.
Always check the terms, because you may not have unlimited withdrawals.
We can help each other with some crowdsourcing. If you know of a good Flexible ISA let me know and I can add them.
I hope this article helped you to understand the great benefits a Flexible ISA can have for business owners, but also everyone else. I also want to see more Flexible ISA options in the future.
Happy investing.
19 thoughts on “Flexible ISA: Business Owner’s Best Lifehack”
Michael, so glad you’re back!
I did a quick check and it turns out the Vanguard ISA is flexible too. Didn’t know about the flexible feature till I read your article.
https://www.vanguardinvestor.co.uk/need-help/answer/is-the-vanguard-isa-a-flexible-isa
Hey Teo, thank you so much. This is very useful, I have added Vanguard to the list!
Good article
Just a little confused rebuilding up a big future allowance as it says pay back in same tax year or have I missed something please?
My use case would be current offset with a view to downsize in few years. So similar to your business example really as ar sale of house in theory some of equity could go straight in the the isa, pot. Of course assuming you could afford to invest in isa anyway guess you’d need to consider opportunity cost of losing x years growth on a standard stocks isa
Hi Paul, you would have to pay the ISA in the same tax-year, yes. So to avoid losing the allowance, you’d have to deposit the amount in your ISA by April 5th. Then next year, from April 6th onwards, you can withdraw money again as long as you pay the ISA back sometime in the next 12 months (by end of tax-year again to stay within the tax-year window).
Agree regarding the opportunity cost, it’s something to consider.
Thank you. May be worth running some example opportunity costs numbers at some point
Thanks for this article Michael, very insightful.
I agree with Paul that it’s great if you don’t plan to grow your gains from investing through the stocks and shares ISA.
The best scenarios would be if you’re thinking on claiming entrepreneur’s relief in a few years or selling assets (property, crypto, etc). Then the gains from these could be deposited into the ISA, perhaps even fully, without having to open a conventional investing account which has capital gains tax.
So – I think I’ve got it right;
—
YR1:
Director has zero ISA balances
Director withdraws 20k from business bank 20k on April 5th
Director deposits 20k into flexible ISA
Director withdraws 20k on April 6th and pays LTD company back
THEREBY ‘securing’ the 20k ISA balance for YR1 (even tho the isa = ZERO)
YR2 – 5:
Does the same as above
Therefore, the total ‘secured’ ISA balance = 100k (even though the isa = ZERO)
so when large inheritance / sell the biz = large cash injection personally, then director can deposit 100k into the ISA as it’s secured from the previous 5yrs… correct?
Assuming that a dual director husband / wife can do this twice to secure x2 the amount?
So we are basically ensuring that the ISA wrapper is available as a carry forward allowance (bit like a pension) to use at a future date?
Thanks!
Carry forward allowance is a great way to put it. You’ve got it exactly right Chris.
You could also add https://www.getchip.uk/savings-accounts/cash-isa
Fancy! Thanks, added.
Just stumbled on you site! Is there anything about the associated companies tax changes? I’m wondering if investing in a holding company is still tax efficient with the changes
Welcome Harry. Taxes are now higher – regardless of associated companies. For example, a company with £100,000 taxable profits has a 22.75% blended corporation tax rate. On £150,000, that’s 24%! Almost as high as 25% which is the upper limit.
Holding companies count as Associated companies and cannot benefit from the Small Profits Rate of corporation tax. An exception holds if the holding company does not carry a trade or a business and has no other assets than the subsidiaries. Also see this post from 2023: https://www.foxymonkey.com/corporation-tax/
Hello Michael, very interesting article and comments!
I would like to build up a flexible ISA allowance using funds from my business. If I borrow funds from the business and deposit £20k in March 2024 and then withdraw the £20k in May 2024 and return the funds to my business – does this mean that I now have a flexible ISA allowance of £20k for 2023/4 and that I don’t ever have to deposit the £20k back into to the flexible ISA as I withdrew the funds in the 2024/25 tax year? I have effectively unlocked a £20k ISA allowance with zero funds indefinitely now in the ISA?
I hope I’ve got this correct! Thanks
Hey Hits, you would need to deposit the cash before tax-year-end for the allowance to continue into the next tax year. Glad you found the answer already, sorry it took me a while to come back to you. All the best with your ISA!
Great shout Michael. I already knew you could do this with a flexible ISA but I never thought to use a Directors loan to do it!
My accountant has already confirmed that there would be no BIK or interest due as the loan would be outstanding for less than a month (using the average method).
Hey Pete, thanks for sharing this update from your accountant. Glad you liked the article!
Cheers,
Michael
Hi Michael
Great article , thanks for that. But can you just clarify that 5 year example for years 2-5 in more detail.
Happy with what is going on in year 1.
Before the end of year 2 (5th April) would you need to add back in £40K or £20K to have the cumulative ISA allowance of 2 years = £40K ?
And by extension, for year 5 , would you be adding just £20K again or the full £100K ?
I am trying to understand the cash flow requirement here to keep the cumulative allowance locked in ?
Thanks
Hi Colin, yeah it’s a bit tricky let me try to clarify it.
Before the end of year 2 (by April 5th) you’d need to add back £40k to keep your £40k allowance of 2 years.
So for year 5, assuming the ISA is empty and has not missed any of the previous allowances, it would require a £100k deposit on April 5th (end) to keep the £100k cumulative allowance going.
All scenarios assume you have withdrawn the entire amount every year, which is why you need to add it back in PLUS the new deposit. If on the other hand you don’t take any deposit out, you wouldn’t need to replenish it at year end. For example, say you already have £80k inside the ISA when entering year 5 and have not withdrawn it. Then you’d only need to add the current tax year allowance (new £20k) to have a £100k allowance when next tax year starts.
I hope that clarifies the situation. Let me know if not!
Yeah thanks Michael.