As a saver looking to make the most of your annual ISA (individual savings account) allowance, you will be keen to slot money away and invest in a way that aligns with your beliefs. This can be a problem if you’re looking for halal options, as most ‘traditional’ cash ISAs which earn interest – or invest in ‘vice’ sectors such as alcohol or gambling – are not shariah-compliant.
But things are changing, and there are now a host of Islamic banks offering halal ISAs. These include the likes of Al Rayan Bank, BLME (Bank of London and the Middle East), Gatehouse Bank, QIB-UK (Qatar Islamic Bank UK), and ADIB (Abu Dhabi Islamic Bank).
There are also lots of high street banks and other institutions offering ISAs which comply with the Sharia rules. And platforms such as Wahed, which specialise in Sharia investments. Note that you do not need to go to an Islamic bank to open a halal ISA. There’s also no requirement to be Muslim to open a halal ISA.
What is an ISA?
An ISA is a wrapper that you can put money into, allowing you to build up savings with all capital gains and income generated free from tax. The ISA limit in the current tax year stands at £20,000.
There are different types of ISA: cash ISAs, stocks-and-shares ISAs, lifetime ISAs (LISAs) and innovative finance ISAs (IFISAs).
Following changes announced in the Autumn Statement (2023), ISA savers can now open more than one type of ISA per tax year. Note, though, that the allowance remains the same at £20,000. While a cash ISA offers a tax-free space for regular savings, those with medium to longer-term financial goals need to take care not to miss out on the benefits that come with an investment ISA.
The key beliefs
Two of the main tenets of Islamic finance include the avoidance of ‘riba’ or ‘interest gained,’ and making sure money is not used to support industries considered to cause harm, such as alcohol, tobacco, pornography and gambling.
How is a halal cash ISA different?
Given that a ‘conventional’ cash ISA earns interest, it is not shariah-compliant. However, with a halal cash ISA, you get what is known as an ‘expected profit rate.’ Both Islamic banks and shariah-compliant accounts use this system. The EPR is an indication of how much profit you can expect to earn from your Islamic account, as opposed to being an amount your savings have accrued. It is similar to the interest rate on regular savings products, and you can use this to compare ISAs and find the best offering.
How do shariah-compliant investments work?
Many ‘traditional’ stocks-and-shares ISAs will not be halal because they invest in areas such as tobacco, alcohol, gambling and non-halal food. But this doesn’t mean you can’t have one. What you can do instead, is put money into Sharia-compliant investments via a stocks-and-shares ISA. Halal ISAs are similar to ‘regular’ stocks-and-shares ISAs in lots of ways. The main difference is the fact there may be a more limited range of investment options.
Is my money safe?
If you’re thinking about putting money in a halal ISA you will want to be sure that it is safe. But the key here is to find out if the bank or institution is part of the Financial Services Compensation Scheme.
If it is, your money will be protected up to £85,000 per person, per banking institution.
It is not possible to protect your investments from poor performance. As an investor, you have to be comfortable with the idea of the value of your investments going down as well as up. But this is distinct from whether or not the ISA is halal.
Can I get a halal LISA?
The simple answer is yes – the lifetime ISA can be halal. A Lifetime ISA (LISA) is an account into which you can save up to £4,000 a year, with the Government then offering a 25% ‘top-up.’ That means that if you manage to tuck away the maximum, you get a £1,000 bonus. There are two types of LISA: one is a cash LISA and the other is a stocks-and-shares LISA.
If you’re looking for a shariah-complaint vehicle, the key is to opt for a stocks-and-shares LISA – and to ensure you’re investing in halal areas. (Cash LISAs are not an option because of the interest earned).
You may also be wondering whether the 25% bonus causes a problem. But the answer is that it is halal, as rather than this being a commercial transaction where you get a return for your money, it’s a dedicated Government scheme, set up for a specific purpose.
Do your research
Before putting your cash into any ISA, you need to do your research carefully to ensure the provider, account or investment that you’re considering meets your principles.
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