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Individual savings accounts (ISAs) let you build your savings or investments without needing to pay tax on the income you earn from them, whether it’s interest or investment returns.
There are a few types of ISA and various ISA rules to consider, so it’s worth knowing how they work so you can make the most of your annual ISA allowance to save tax-free.
What is an ISA?
An ISA lets you save or invest without being taxed on the interest or income you earn on your money. Each tax year you get an annual ISA allowance, which is currently £20,000, that you can split across all of your ISAs.
There are different types of ISA to choose from. While some are more flexible than others, the best ISA for you will depend on your overall savings goals. The types of ISAs are:
- cash ISA
- stocks and shares ISA
- Lifetime ISA
- innovative finance ISA
In addition, a Junior ISA (JISA) is a type of ISA that you can use to save for a child. You can open either a cash or stocks and shares JISA and the annual JISA allowance is £9,000.
How do ISAs work?
The different types of ISA all work differently. To choose which ISAs to use, think about your savings goals and how you will want to access the money.
For example, if you know you’ll need quick access to your money, an easy-access cash ISA is likely to be the most flexible option. But your interest rate won’t be fixed, meaning it can rise or fall.
If you’re happy to put your money aside for the longer term, investing your money within a stocks and shares ISA has historically led to higher returns than the interest earned in a cash ISA. On the other hand, there’s a risk that you’ll get back less than you invested.
New ISA rules introduced in April 2024 mean it’s possible to open and pay into multiple ISAs of the same type in the same tax year (not including Lifetime and Junior ISAs). You can mix and match depending on your goals, paying into multiple ISAs as long as the total amount saved remains within your annual allowance.
Only people who are 18 or over can open an ISA, although you can open a Junior ISA for your child if you want to save money on behalf of someone who’s under 18.
Like a standard savings account, there are different types of cash ISA, including easy-access and fixed-rate cash ISAs. Look for accounts paying high interest rates while offering access to the money you need.
The variable interest rates offered on easy-access accounts can change for a number of reasons, such as base rate changes. Locking in a fixed rate means it will stay the same for the duration of the fixed period, but you’ll have less easy access to your money for the duration of the fixed rate.
A cash ISA is straightforward and usually simple to withdraw your money from. And if you save with an authorised bank or building society, your money will be protected by the Financial Services Compensation Scheme (FSCS) up to the value of £85,000.
These let you hold investment products such as corporate bonds, funds and stocks and shares in a tax-free wrapper. Your investment growth and any withdrawals you make are not subject to tax.
You can get a stocks and shares ISA from an online investment platform or bank. These will charge for their services, such as trading and annual fees, so shop around to make sure you don’t pay more than you need to.
Investing is generally better suited to more long-term savings goals. Many experts suggest that it’s a good idea to invest for five years or more, which can give your investments time to recover from downturns in the market.
It’s possible you could get higher returns with this type of ISA compared to a cash ISA, but there’s more risk – investments can go down as well as up and you may get back less than you invested. It can also be a longer process to extract your cash, so you may not get instant access to your money.
Like a cash ISA, if your investment platform or bank goes bust, your money is protected by the FSCS scheme up to £85,000. Importantly this doesn’t cover you if your investments lose money.
A Lifetime ISA (LISA) is an option when saving for a house deposit or retirement, because the government tops up your contributions by 25%. You must open and make a first payment to your LISA before you’re 40, but you can contribute into a LISA until you’re 50.
There are both cash and stocks and shares LISAs available, but you can only access the money in a LISA to buy your first home, or when you reach 60.
You can save a maximum of £4,000 a year in a LISA. If you save the full amount, the government will contribute £1,000. But you don’t need to save the maximum to get the top-up, so if you can save £2,000 for example, the government will still pay in £500.
If you want to withdraw LISA money for reasons other than buying your first home or before you’re 60, you’ll have to pay a 25% penalty. This exceeds the government top-up and means you’ll get back less than you put in. The only exception to this rule is if you want to withdraw the funds because you’re terminally ill.
Help To Buy ISAs which were also ISA products aimed at helping people buy their first homes are no longer available to new savers. But if you already have an existing Help To Buy ISA, you can keep saving into it until November 2029.
This type of ISA lets you put your money into peer-to-peer (P2P) lending and crowdfunding, as well as long-term asset funds and property authorised investment funds. The IFISA allows you to use your annual allowance for these types of investments rather than cash or stocks and shares. Any income you make isn’t taxed.
Innovative finance ISAs offer the possibility of your money growing faster than holding it in cash. However, they’re considered riskier, because the people or businesses you’re lending to may default on their loan. And you may not get instant access to your money, because you could have to wait for a replacement lender to take on your P2P lending before you can close your IFISA, for example.
Funds invested in an IFISA also aren’t protected by the FSCS, which means if the provider goes bust, you won’t be able to make a claim.
If you have children or are a guardian with parental responsibility for a child, you can open a Junior ISA (JISA) for them. The child needs to live in the UK and be under 18.
A JISA can be a useful way to build savings for your child separate from your own. You can’t put more than £9,000 a year into JISAs in the current tax year, so the limit is much lower than adult ISAs.
Like adult ISAs, the money can be invested in cash, stocks and shares or both, but unlike the grown-up version, you can’t access the money. Even though you manage and save into the account, the money is the child’s.
The child can only withdraw money once they’re 18, but they can start managing the account when they’re 16. The JISA becomes an adult ISA when they reach 18.
JISAs replaced Child Trust Funds, but a child can’t have both a JISA and a Child Trust Fund. A Child Trust Fund would have to be transferred to a JISA.
Are ISAs worth it?
ISAs are worth considering because of the ability to earn tax-free interest or income on your savings. You also don’t have to pay any tax when you withdraw the money.
If you have cash savings, you might wonder whether that matters, considering your personal savings allowance (PSA). The PSA lets basic-rate taxpayers earn £1,000 in interest each year on cash accounts before paying tax, or £500 a year for higher-rate taxpayers. Additional-rate taxpayers have no allowance. There are also other allowances, such as the starting rate for savings, which may allow you to save more without being taxed.
However, higher interest rates in recent years, potentially leading to a tax liability on savings income, have led more people to reconsider ISAs as a tax-efficient way to set money aside.
Higher interest rates mean that those saving in regular savings accounts could be caught by a savings ‘tax trap’, whereby they breach their PSA and have to pay tax on their savings.
Here’s our breakdown of why the different ISA types may be worth it:
- As opposed to a standard savings account, a cash ISA can help protect your savings from tax over time, because you won’t be taxed on the interest earned as your ISA grows. Shop around for the best cash ISA rates to get the most from your money.
- When it comes to investing, tax on savings income can be a concern too. Returns can be unpredictable, but a stocks and shares ISA shields your investments and potential investment growth from taxes such as capital gains tax.
- Stocks and shares ISAs also come with the possibility of earning more on your savings than interest from a cash ISA. But because interest rates have been higher and beating inflation recently, the risk-averse may be more comfortable with the certainty of saving in a cash ISA at one of the top rates.
- The Lifetime ISA may be worth considering too, especially if you’re saving for your first home. The government bonus is worth a maximum of £1,000 a year. That’s a big return on your ISA contributions, even before you consider interest or investment income earned.
🤓 Nerdy Tip
The best cash ISA rates available at the moment sit at around 5%, but your choice of provider may also be influenced by other factors, such as the customer service available and whether it’s a brand you recognise. It’s a good idea to compare ISA accounts by shopping around.
» MORE: Is an ISA or savings account best for you?
What does the base rate of interest mean for ISAs?
The base rate of interest can influence the interest you earn on savings and how much it costs to borrow money, for example personal loan rates and mortgage rates.
In August 2024, the Bank of England voted to reduce the base rate of interest from 5.25% to 5%, and it led to some cash ISA providers cutting their rates.
Easy access and notice cash ISAs usually have variable rates, which means providers can change the rate when the base rate changes. Fixed-rate ISAs come with a rate that stays the same for a fixed period, but access to your money is restricted until that time’s up.
If you can lock away your savings for a year or more, a fixed-rate ISA may shield your savings from future drops in interest rates, but you risk missing out on future rate rises.
Whether you choose to lock away your savings for a guaranteed rate or accept a variable rate for easier access depends on your overall savings goals.
ISA rules
There are rules around opening and paying into your account that you need to stick to. These include rules around who can open an account, how to use your ISA allowance and how to transfer ISAs.
Who can open an ISA?
You must be a UK resident to open an ISA, and there are age restrictions that depend on the type of ISA you’re opening:
| Type of ISA | Age restrictions |
|---|---|
| Cash ISA | 18 or over |
| Stocks and shares ISA | 18 or over |
| Innovative finance ISA | 18 or over |
| Lifetime ISA | 18 to 40, and you can pay into it until you’re 50 |
| Junior ISA | 16 and 17 year olds, or a parent or guardian opening it for a child under 16 |
How much can you put in an ISA?
Adults have a £20,000 ISA allowance that they can split across different accounts.
- Adult ISAs have an allowance of £20,000 in the current tax year, but you can split it across different ISA types. That might be half in stocks and shares, and half in cash.
- Lifetime ISAs have an annual limit of £4,000, which counts towards your £20,000 ISA allowance. If you want to save more, you’ll need to open another type of savings account. Remember, the government tops up your contributions by 25%, so £4,000 saved is topped up to £5,000.
- Junior ISAs have an allowance of £9,000 in the current tax year. This is separate from an adult’s £20,000 ISA allowance.
| Type of ISA | Maximum contributions in the current tax year |
|---|---|
| Cash ISA | £20,000 |
| Stocks and shares ISA | £20,000 |
| Innovative finance ISA | £20,000 |
| Lifetime ISA | £4,000 (counts towards your £20,000 allowance) |
| Junior ISA | £9,000 (a separate allowance for your child) |
Can you withdraw money without affecting your ISA allowance?
Some providers allow you to take money out of an ISA and pay it back in during the same tax year without affecting your allowance. Providers call these ‘flexible’ ISAs, so if this is a feature you’d like, check for it when shopping around.
If you already have an account and are thinking about withdrawing money, find out whether it’s flexible or not beforehand to save any headaches around maximising your ISA allowance.
Does an ISA transfer count towards your allowance?
If you follow the right process when transferring your ISA, moving your money into a new account doesn’t count towards your annual ISA allowance.
If you simply close one ISA account and move the money into a new one, you’ll lose the tax-free status of that cash. Instead, you need to ask your new ISA provider to transfer the money for you, often by filling in a transfer form. You should check that your new provider accepts transfers and find out if there are any transfer or exit fees.
The transfer process may be different depending on the type of ISA you want to transfer and the type of ISA you’re transferring it to, so check with the provider before making a move. There may be restrictions and transferring investments can take longer than transferring cash.
Transferring could help you secure a higher interest rate, or lower fees if you’re moving a stocks and shares ISA. It’s worth keeping an eye on what’s available to make sure you’re getting a good deal.
Some ISA providers now allow you to partially transfer money saved in the same tax year between providers. For example, if you have £10,000 saved with one provider it’s possible to transfer just £5,000 to another provider. Before April 2024, it was only possible to transfer the whole amount if it was money saved in the same tax year – partial transfers were limited to savings from previous tax years.
How many ISAs can you have?
Except for Lifetime and Junior ISAs, there isn’t a limit to the number of ISAs you can have. You can also open and pay into multiple types of the same ISA in the same tax year, as long as you don’t exceed your annual allowance.
Before April 2024, you could hold multiple ISAs but only pay into one ISA of each type every tax year. This new ISA rule is designed to increase competition among providers, potentially leading to better deals for savers – so to make the most of it, be sure to shop around.
Bear in mind that tax rules may change in the future. If you’re not sure about which type of ISA is right for you, a financial adviser can help.
WARNING: We can’t tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk and you may get back less than originally paid in.
Dive even deeper
Cash ISAs: Your Guide to Getting Started
by Felicity Hannah
Stocks and Shares ISA Explained
by Hannah Smith
by John Fitzsimons