ISAs explained
What is an ISA?
ISA stands for Individual Savings Account. ISAs are a tax-efficient way of saving money. You can save or invest up to a set amount (your ISA allowance) each tax year and you don't pay any tax on the income or capital gains (for a stocks and shares ISA, like ours) or on the interest paid (for a cash ISA).
Types of ISA
You can have any combination of these different types of ISA:
- stocks and shares ISA
- cash ISA
- Innovative Finance ISA
- Lifetime ISA (or LISA)
If you’re the parent or guardian of a child aged under 18 you can take out a junior cash or stocks and shares ISA for them. If they’re aged 16 or 17, they can open the account themselves.
All ISA types
You can save into different types of ISA at the same time, up to a total value of £20,000 per year (known as your ISA allowance). You can only pay into one Lifetime ISA each year, up to an annual limit of £4,000.
To set an ISA up you have to be:
- a UK resident
- or if you’re not a UK resident:
- a Crown servant (for example you might be on diplomatic or overseas civil service) or
- the spouse or civil partner of a Crown servant
You can’t share an ISA or set one up on behalf of another adult, unless you hold lasting power of attorney, though you may be able to open a junior ISA for a child aged under 18.
There are also some very important differences between ISAs. Understanding those differences will help you decide which type of ISA might be right for you. Once you have decided on the type of ISA, or ISAs, you want to invest in, you’ll need to shop around to find the right on for you.
Different types of ISA
A stocks and shares ISA lets you put your money into several different types of investment without having to pay tax on any income or growth. You can invest in:
- company shares
- unit trusts and investment funds
- corporate bonds
- government bonds
Different providers wrap stocks and shares ISAs around different combinations of those.
A cash ISA is a tax-efficient savings account. As with any savings account, you put money into it and leave it there to earn interest for you. That interest will be tax-free.
But standard savings accounts might give you higher interest rates and more flexibility. And you have to earn at least £1,000 of interest in a tax year before you'll pay any tax on it (although if you're a higher rate tax payer you'll only have a £500 allowance, and if you're a highest rate tax payer you won't have any tax-free allowance).
There is FSCS protection in place for for cash ISAs, up to £85,000 per person per provider.
An Innovative Finance ISA (or IFISA) lets you invest tax-free in:
- peer-to-peer loans, when you lend to other people or businesses without using a bank
- crowdfunding debentures, when you invest in a business by buying its debt
As with a stocks and shares ISA, an Innovative Finance ISA might perform better than cash savings. But its value could also go down.
If you’re saving for a first home that will cost less than £450,000, or towards your retirement, a Lifetime ISA could be a good choice. You can put up to £4,000 a year into one – and the government will add 25% to everything you save. Depending on the Lifetime ISA you choose, you can save cash or invest in stocks and shares. If you don’t access the money to buy your first home, you won’t be able to withdraw it until you reach age 60, otherwise a 25% government withdrawal charge will apply, which means you could get back less than you paid in.
A child aged 16 or over can open a cash junior ISA. If you’re the parent or guardian of a child aged under 18 you can open up a junior cash and/or stocks and shares ISA for them. Anyone can then pay into it, up to £9,000 per tax year. You’ll manage the account until they’re at least 16, and once they turn 18 it will automatically turn into an ISA. They can then choose to keep the money invested or they can start withdrawing it.
What’s the best ISA for me?
Start by asking yourself:
Are you saving for:
- A specific target or deadline?
- An unexpected rainy day?
Do you want a way of saving that:
- Safeguards your money but might not help it grow as much?
- Has the potential to grow your money, with the risk of losing some of it?
Do you want to save money:
- For the short term – five years or less?
- For the mid to long term – five years or more?
To help you decide:
Are you looking for...
| Cash ISA | S&S ISA | IFISA | LISA* | |
| No risk of losing some of your money? |
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| Potentially higher returns? |
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| An ISA that’s generally better for up to five years of saving? |
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| An ISA that’s generally better for five years plus of saving? |
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| A way of saving without investing your money? |
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| Potential growth through investments doing well? |
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*In this table we've compared a stocks and shares Lifetime ISA, but you can also choose a cash Lifetime ISA. In this case, you can compare it to an ordinary cash ISA.
ISA allowance
An ISA allowance is the maximum amount you can save in ISAs per tax year (6 April to 5 April the following year). The current ISA allowance is £20,000. You can pay into multiple ISAs of the same type within a tax year, as long as you don't exceed your annual ISA allowance.
If you don’t use your entire ISA allowance, you will not be able to carry it forward to the next year. Each new tax year, your ISA allowance resets to £20,000.
ISA tax
ISAs are a tax-efficient way of saving your money. You don’t pay tax on interest, dividends or capital gains earned within an ISA. These returns do not count towards your £20,000 annual ISA allowance.
ISAs form part of your estate for inheritance tax purposes, so inheritance tax may be payable if the total estate exceeds the available thresholds. You can learn more on our inheritance tax page.
If your spouse or civil partner had an ISA and has passed away, you can apply for an extra ISA allowance, called an Additional Permitted Subscription (APS).
The amount you can apply for depends on:
- the date of your spouse/civil partner’s death
- how much money was in the ISA at the time of their passing
- when the ISA was closed
How many ISAs can I have?
There’s no limit on the number of ISAs you can own. This can be any combination of the four types. However, you can only pay into one Lifetime ISA each tax year.
While there’s no legal limit, some providers might limit how many you can take out.
What should I do next?
We’ve shared basic details of all the different types of ISA, helped guide you through which may be best for you, and set out the rules that apply. Now it’s over to you to:
- Think through your savings goals. How much do you think you’ll be saving, for how long and for what purpose? That’ll help you work out which ISA is best for you.
- If you haven’t checked it out already, take a look at our Investing for beginners article. It’ll help you get to grips with the investment basics.
- For some free and impartial financial guidance, visit MoneyHelper. It’s a government-backed service that’ll help you understand and think through your options.
- For general inspiration and money-management tips, listen to our A Little Bit Richer podcast. It’ll help you learn about investing, set realistic financial goals, and hopefully enjoy your money today, too.
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FAQs
ISAs form part of your estate, so when you pass away your loved ones can inherit your money. If your total estate is worth more than the maximum inheritance limit, they will have to pay inheritance tax.
Yes, we offer savings and investment advice. Check out our savings and investment advice page for more details.
That depends on the type of ISA you're looking for and how confident you are in managing your ISA yourself. Stocks and shares ISAs can create a return that’s higher than the inflation rate, making them a great option for first-time investors.
No, there are four types of ISA (excluding junior ISAs). Most ISAs invest in cash or stocks and shares.
Yes. The value of your investment will go up and down. It isn’t guaranteed, so you may get back less than you put in.