Holly Bennett
Sam Bromley
An individual savings account (ISA) lets you build your savings or investments without worrying about tax. There are a few types of ISAs, so it’s worth knowing how each one works so you can choose the right one for you.
What is an ISA?
An ISA lets you save or invest money without being taxed on the interest or income you earn from it. There are a few different types to choose from, and some are more flexible than others. Each tax year you get an annual allowance, which is currently £20,000, that you can split across all of your ISAs.
From 6 April 2024, you can open and pay into multiple ISAs of the same type in the same tax year (not including Lifetime and Junior ISAs). This means you could open three cash ISAs and two stocks and shares ISAs, for example – paying into all of them as long as the total amount saved remains within your annual allowance.
Are ISAs worth it?
The main selling point for ISAs is that the money you earn in interest on savings or income from investments is tax-free. You also don’t have to pay any tax when you withdraw the money.
As great as that sounds, you might wonder if that matters, considering the personal savings allowance (PSA) is in place. 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 personal allowance and starting rate for savings, which may allow you to save more without being taxed.
However, with interest rates sitting at higher levels in recent years, more people could be caught by a savings ‘tax trap’, whereby they breach their PSA and have to pay tax on their savings.
This may make an ISA a worthwhile option. As opposed to a standard savings account, an ISA can help protect your savings from tax over time, because you won’t be taxed on the interest earned as your ISA grows.
The issue of tax on savings income can also be a concern if you are planning to use an ISA for investing because the returns can be unpredictable and you will benefit from shielding your investments from taxes such as capital gains.
In addition to this, you may also want to make the most of the Lifetime ISA, which gives you a government bonus on your savings if you’re saving for your first home or retirement.
» MORE: Is an ISA or savings account best for you?
How do different types of ISAs work?
There are four types of ISA available for adults, and they each work slightly differently. To help you decide which one to go for, think about your savings goals and how you will want to access the money.
Cash ISAs
Like a standard savings account, there are different types of cash ISAs, including easy-access and fixed-rate cash ISAs. Look for accounts paying the highest interest rates you can get while offering the access to your cash when you need it.
A cash ISA is straightforward and usually simple to withdraw your money from. Your money is covered by the Financial Services Compensation Scheme (FSCS) up to £85,000.
Stocks and shares ISAs
These let you hold investment products such as corporate bonds, funds and stocks and shares in a tax-free wrapper. This means 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.
It’s possible you could get higher returns with this type of ISA compared to a cash ISA, but there is more risk, as 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 a firm you have invested in goes bust your money is protected by the FSCS scheme up to £85,000. But it’s worth noting that you are not covered for your investments’ performance and any downturn you see.
Lifetime ISAs (LISAs)
LISAs can be a great way to save for a house or retirement. From the age of 18 until you are 40, you can save a maximum of £4,000 a year with a lifetime ISA (LISA), and the government tops it up with a 25% bonus. So if you save the full £4,000 in a year, the government will contribute £1,000. You can put money into a LISA until you’re 50.
You can invest it in cash or stocks and shares, but you can only use money in a LISA to buy your first home or save for later life. This means you will have to pay penalties that exceed the bonus if you withdraw it for any other reason, unless you are 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.
Innovative finance ISAs (IFISAs)
This type of ISA lets you put your money into peer-to-peer lending and crowdfunding, and from 6 April 2024, 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. Whatever income you make is not taxed because it’s held in a tax-free wrapper.
Innovative finance ISAs can offer the possibility of your money growing faster. However, they are considered riskier than holding your money in cash, though, because the people or businesses you are lending to may default on their loan. And again, you may not get instant access to your money, as, for example, you may have to wait for a replacement lender to take on your P2P lending before you can close your IFISA.
Junior ISAs
For under-18s, there are Junior ISAs (JISAs). JISAs are the replacement for Child Trust Funds.
Like adult ISAs, the money can be invested in cash or stocks and shares, but unlike the grown-up version, instant access isn’t an option.
Savings can only be withdrawn once the child turns 18. Any 16- and 17-year olds who have a lot of cash to save can open both adult and junior accounts and benefit from both allowances. Once they reach 18, the JISA will become an adult ISA.
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 the account in the current tax year, so the limit is much lower than adult 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 are opening:
| Type of ISA | Age restrictions | Maximum contributions in 2024/25 tax year* |
|---|---|---|
| Cash ISA | 18 or over (from April 2024) | £20,000 |
| Stocks and shares ISA | 18 or over | £20,000 |
| Innovative finance ISA | 18 or over | £20,000 |
| Lifetime ISA | 18 to 40, and you can pay into it until you’re 50 | £4,000 |
| Junior ISA | Under 18, or a parent or guardian opening it for their child | £9,000 |
*You can save up to £20,000 in one type of account or split the allowance across some or all of the other types. You can only pay £4,000 into your Lifetime ISA in a tax year. Junior ISAs have a separate annual allowance.
Managing your ISA
Once you’ve set up your ISA, you’ll need to be clear about what you can and can’t do with it.
How much can you put in an ISA?
As you can see in the table above, your ISA allowance depends on the type of ISA you have:
- Adult ISAs have an allowance of £20,000 in the current tax year, but you can split it across different ISA types. So that might be half in stocks and shares, and half in cash.
- Junior ISAs have an allowance of £9,000 in the current tax year.
- Lifetime ISAs have an annual limit of £4,000. So 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 would be topped up to £5,000.
Can you withdraw money and pay it back in?
Some providers of flexible ISAs let you take money out of the account and pay it back in during the same tax year, without affecting your allowance. Check if this is the case before you make a move, though.
Can you switch ISAs?
You can transfer ISA providers, perhaps to secure a higher interest rate or change your type of ISA account, maybe from a cash ISA to a stocks and shares ISA. But there is a process to follow and there may be restrictions if you’re transferring investments.
If you simply close one ISA account and open a new one, you will lose the tax-free status of that cash. Instead, you need to ask your new ISA provider to transfer the money for you. You just need to check that your new provider accepts transfers, and if there are any transfer or exit fees, and follow its process.
From 6 April 2024, some ISA providers can 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. Previously, 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?
With the exception of the Lifetime and Junior ISAs, from April 2024 it’s possible to 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.
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
Cash ISAs are a simple and accessible way to save money. Read on to find out which cash ISA could suit you best.
Felicity Hannah
Stocks and Shares ISA Explained
You may have previously saved in a cash ISA and are now thinking about investing your money. A stocks and shares ISA can help you take that next step.
Hannah Smith
Lifetime ISA: Bonus on Savings for a Home or Retirement
If you’re aged 18 to 40, you can open a lifetime ISA (LISA) and earn a 25% annual bonus on up to £4,000 in savings, until you’re 50.
John Fitzsimons