ISAs, ISAs, ISAs; the tax-efficient (albeit quite confusing) savings account of the UK. Although designed to be a great product to help everyday people save their money without paying additional tax, ISAs are a head-scratching topic for many.
With the different ISA types on offer, new rules that came into effect in April 2024, and grey area surrounding the limits you’re allowed to save for each type — it’s no wonder!
Stick with us as we break down the different types and key points you need to know, before you decide which of them is the right product for you.
Please note: your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
What is an ISA?
‘ISA’ is short for Individual Savings Account, and they’re designed to help you save or invest your money in a tax-free way. By using ISAs, you can take advantage of their tax-free benefits, which in short means you won’t pay further tax on any gains you make from the money you deposit in them. Rolled out in April 1999, ISAs replaced the Tax-Exempt Special Savings Accounts (TESSAs) and Personal Equity Plans (PEPs) that were previously available.
In a nutshell, there are two ways an ISA helps you:
Saving cash
You can opt for an ISA that allows you to save your money (meaning you won’t pay any tax on the interest that the savings builds up).
Investing your money
Or, you can choose an ISA type that allows you to invest the money instead (this route means you won’t pay any Capital Gains Tax or Income Tax on the profits you make).
What are the different types of ISA?
There are four types of ISAs available for adults:
- Stocks and Shares ISAs
- Cash ISAs
- Lifetime ISAs
- Innovative Finance ISAs
There’s also another type for children that a parent/guardian manages on their behalf: the Junior ISA.
Under the new ISA rules, you can now have multiple types of these ISAs – with the exception of the Lifetime ISA (limited to one per adult) – or Junior ISAs (limited to one of each type per child; one Junior Stocks and Shares ISA, and/or one Junior Cash ISA).
Whether you choose to deposit your money into just one type of ISA to keep things easy to manage, or would prefer to have multiple types with different providers — the choice is yours. But it’s important to know that you are responsible for not going over your annual allowance.
Stocks and Shares ISAs
Suitable if your goal is to: Invest your money for the long term with the hope it grows more wealth.
Also known as: Investment ISA.
Maximum you can deposit: £20,000* during each tax year.
Tax year dates: 6th April to the following 5th April.
Tax benefit: No Capital Gains Tax or Income Tax to pay on the gains you make or on the income you earn (dividends or interest).
As the name suggests, this ISA type is for investing up to £20,000* of your money during each tax year. As soon as 6th April arrives, we’re at the start of a new tax year and the allowance resets itself.
With a Stocks and Shares ISA, your money is invested in assets like shares, government bonds (called ‘Gilts’ in the UK), property, commodities, or mutual funds (which are like bundles of different assets that let you invest a smaller amounts of money into a variety of places; this keeps your portfolio diversified, and lowers the risk of putting all your eggs into one company’s basket).
Holding a Stocks and Shares ISA does present some risk, since there’s no guaranteed return and the value of your investments could go down as well as up. But on the other hand, this could also give you an opportunity to earn higher returns than you can from your cash savings.
Many people consider investing for their long-term goals, typically doing so for at least 5-10 years. This line of thinking comes from the idea that the longer the money is invested, the more likely it would benefit from compounding; reinvesting any profits that are made from the investments, which in turn could make their own profits and build up over time.
Investing can seem like a big step for anyone who’s new to it, but you don’t need to be actively investigating which stock to choose or monitoring how the markets are looking (unless you want to, of course). But for most of us, with our busy lives and plates that are already quite full, there are services available that will invest on your behalf — and usually charge a low annual fee to do so.
We offer this style of investing at Wealthify, with our Stocks and Shares ISA being our longest-standing product to date. We have an expert Investment Team constantly monitoring the trends of the markets across the globe. We take care to make sure your Investment Style aligns with your attitude to risk (from Cautious to Adventurous) and give you the option to invest in line with your values (Original or Ethical Plans are available), — and our Investment Team gets to work with building your Wealthify Plan from there.
Please remember, with investing your capital is at risk. The value of your investments can go down as well as up, and you could get back less than invested.
Cash ISA
Suitable if your goal is to: Save your money in an account that lets you build interest.
Maximum you can deposit: £20,000* during each tax year.
Tax year dates: 6th April to the following 5th April.
Tax benefit: No tax to be paid on the interest that builds up.
A Cash ISA mainly works like a traditional savings account. You can open a Cash ISA if you’re a UK resident aged 18 or over, and it lets you save money while also paying you interest. The benefit being that when you hold a Cash ISA, you don’t pay any tax on the interest you earn — whereas with a traditional bank or building society’s savings account, you will usually pay Income Tax on earnings exceeding £1,000.
Some people might consider paying into a Cash ISA to be a safer option, as your savings aren’t subject to market ups and downs like they are with investing. However, it’s important to remember that if the rate of inflation outpaces the interest rate your Cash ISA earns, the value of your savings could actually go down a little in real terms.
When shopping around for a Cash ISA, the AER% (Annual Equivalent Rate) will indicate how much money you receive if your interest was paid and compounded once each. The higher the percentage, the more you’ll earn. However, it depends on how much you hold in the account and for how long, whether the rate is variable (moving in line with the Bank of England’s interest rate), and whether the interest is accrued monthly or annually.
Another thing to consider is whether your Cash ISA is fixed for a set amount of time, or it’s instantly accessible if you need money in an emergency. You can also get flexible Cash ISAs, meaning you can deposit and withdraw from a flexible Cash ISA (up to the maximum £20,000* allowance spread between all your ISA accounts, that is).
The best option for you will be down to your unique savings goal.
Lifetime ISA
Suitable if your goal is to: Save up for your first home deposit or use it as a personal retirement pot.
Also known as: LISA; pronounced lie-sa, not like the name Lisa Simpson.
Maximum you can deposit: £4,000* during each tax year (you’re free to use the remaining £16,000 in other types of ISAs).
Tax year dates: 6th April to the following 5th April.
Tax benefit: LISAs can be savings or investment accounts, but either way, you don’t have to pay any tax on any interest or gains you make on your money. Plus, the government tops up an extra 25% bonus of any amount you deposit.
Things to note: You must be between 18-39 to open one; you can pay into one until you’re 50; and if using it for a property deposit, then the home you want to buy must cost £450,000 or less.
Lifetime ISAs are the one out of the bunch that comes with the most rules and considerations. But that isn’t to say that a LISA isn’t a fantastic product for people looking to get on the property ladder. LISAs have become the go-to
savings ISA for first-time property buyers since the ‘Help-to-Buy ISA’ scheme stopped being available to new customers in 2019 (and as a side note, if you have a Help-to-Buy ISA, you’ll only be able to contribute to it until 2029).
With this type of ISA, you’ll receive a 25% bonus on anything you’re putting in; this is £1 for every £4 you put in, up to a maximum of £1,000 per year. Where applicable, this bonus is paid at the end of each month, and you’ll then get interest or potential investment growth on it.
Opting for a Lifetime ISA means you can hold cash or investments, or a combination of both, and the choice is up to you.
Lifetime ISAs come with many rules, for example:
- You must be at least 18 but under 40 to open a Lifetime ISA.
- The maximum amount you can put in each tax year is £4,000.
- You can contribute to your Lifetime ISA until your 50th birthday.
- If you intend to purchase a house, you must be a first-time buyer, meaning you’ve never owned a property in the UK.
- The home you want to buy must cost £450,000 or less.
- Once you start a Lifetime ISA, you must keep it open for at least 12 months before you can use it for a deposit for your first house.
- You need to use a conveyancer or solicitor to act on your behalf when making the property purchase, which will incur additional costs.
- Your property must be bought with a mortgage.
- The funds in your Lifetime ISA can only be withdrawn to purchase your first home or once you turn 60 (or in certain circumstances where you are terminally ill). If you withdraw funds early, or for any other reason, you’ll be charged 25% of the amount you withdraw.
As mentioned above, you could open a Help to Buy ISA to assist with buying your first home until November 2019 (if you opened one before this date, you can still deposit money into it under 2029 and gain the government bonus until 2030.). If you missed the deadline to open a Help to Buy ISA, then a Lifetime ISA is an alternative that you could use to save for your first property.
Innovative finance ISA
Suitable if your goal is to: Looking to invest in something like a peer-to-peer loan or crowdfunding venture.
Also known as: IFISAs.
Maximum you can deposit: £20,000* during each tax year.
Tax year dates: 6th April to the following 5th April.
Tax benefit: No tax to pay on any gains or interest you earn.
Things to note: Innovative Finance ISAs have more risk than the other ISA types, you aren’t protect from any losses, and there’s no FSCS protection. Only your potential returns would be tax free.
An Innovative Finance ISA enables you to become a lender, providing loans to approved individuals and businesses via an online peer-to-peer lending platform. This is in return for a fixed amount of interest over a set period and paying no tax on the interest you earn.
Without a bank acting as the ‘middleman’, there’s a more direct lender-borrower relationship, which can mean greater opportunities for all participants. But that also comes with greater risks, since borrowers can default and fail to pay you back. And in such situations, you would be unable to make a claim for compensation because your money isn’t protected by the Financial Services Compensation Scheme.
So, make sure you are fully aware of all of the risks of an Innovative Finance ISA before you invest. Please note that Wealthify does not offer these products and we do not offer advice. If you are unsure whether investing is right for you, you should speak to a regulated financial adviser.
Junior ISA
Suitable if your goal is to: Save or invest on your child’s behalf up until they turn 18.
Also known as: JISAs.
Maximum you can deposit: £9,000** during each tax year (this is the child’s allowance, not yours).
Tax year dates: 6th April to the following 5th April.
Tax benefit: No tax to pay on any gains, or interest that your child’s money earns.
Things to note: Your child could have a Junior Stocks and Shares ISA for investing, a Junior Cash ISA for saving, or a combination of both. Only one of each type is allowed to be active at any given time, and you can’t withdraw any money as the parent/guardian.
Junior ISAs (JISAs) allow you to give your little ones a head start in life. Launched in 2011 by the government to replace Child Trust Funds, Junior ISAs enable you to save and/or invest for your children in a tax-efficient way. You can open a Junior ISA for your child at any time, as long as they’re under 18, live in the UK, and don’t already have a Child Trust Fund (if they do, you can transfer the amount to a Junior ISA, which will close the Child Trust Fund down).
Junior ISAs come with an annual Junior ISA allowance — in other words, the amount you can put in your child’s Junior ISA each tax year is limited.
When looking to open a Junior ISA, you can choose to pay into a Junior Cash ISA or Junior Stocks and Shares ISA (or both, as long as you never go over your child’s annual allowance). And unlike an adult ISA, where you can open as many types of ISAs as you’d like during each tax year (with the exception of a Lifetime ISA), your child can only have one Junior Cash ISA and one Junior Stocks and Shares ISA account open at any given time throughout their childhood. However, transferring to another provider is an easy option, if you wish.
- A Junior Cash ISA allows you to save money and your child won’t pay tax on any interest earned.
- If you opt for a Junior Stocks and Shares ISA, your money will be invested in shares and other types of assets, and your child won’t pay any tax on any capital gains or income (interest and dividends) they receive.
One thing to keep in mind though is that any Junior ISA you open is owned by your child and no one else. When your child turns 18, they can access their money and their Junior ISA matures into an adult ISA, giving them the opportunity to keep building their financial future in a tax-efficient way.
If you’re unhappy with the returns your child is getting or think you’re paying too much in fees, consider transferring their Junior ISA to another provider. Make sure you compare Junior ISA providers and consider looking into the best child ISA rates for a Junior Cash ISA, and weighing up the projected returns for the Junior Stocks and Shares ISA — depending on which product you’re interested in.
If the transfer occurs between two Junior Cash ISAs or two Junior Stocks and Shares ISAs, you must transfer the full balance. If you decide to transfer a Junior Cash ISA to a Junior Stocks and Shares ISA, or vice versa, you can move the balance in full or part.
It’s also possible to transfer a Child Trust Fund into either type of Junior ISA, as long as you use the official transfer form and transfer the full balance. Once the Trust Fund is transferred, it’ll be closed down.
For more information, please read our article on Junior ISA transfers.
Note: With a Junior Stocks and Shares ISA, your capital is at risk and your child could get back less than invested.
How many ISAs can I have?
Aside from the Lifetime ISA (one per adult) and the Junior ISA (one of each type per child), you can open as many of the other ISA types with as many providers available as you like!
The catch is that you are the one responsible for keeping track of how much of your annual ISA allowance you’ve used. Having multiple products with the same provider may allow you to better track how much you’ve deposited during the tax year, but ultimately, it’s your responsibility to monitor it.
How much can you put in an ISA?
Everyone who’s 18 or above and a UK resident has an ISA allowance of £20,000 per tax year*, and if you want to take advantage of yours, you just need to be mindful that this allowance is spread across all the different ISAs you may have. (Please note: there’s a maximum cap of £4,000 to be mindful of for the Lifetime ISA, but you’re then able to use the remaining £16,000 in the other types of ISA during that tax year.)
Similarly, if you’re saving or investing for your child, keep in mind that each child has a Junior ISA allowance of £9,000 per tax year.
How to open an ISA account
If you’ve found the best-suited ISA for your individual goal and a provider that seems to be a good fit for you, you should be able to sign up to their service, as long as you are:
- A UK resident who is 18 or over, you can open any adult ISA available to you (noting that Lifetime ISAs can only be opened between the ages of 18-39).
Or, if you aren’t a UK resident, you may still be able to open an ISA if you’re:
- A Crown servant, or the spouse or civil partner of one (e.g. diplomatic or overseas civil service).
Whichever ISA you decide to go for, you should be able to put its powerful tax-efficiency in a way that benefits your overall goal. Whether you’re saving for retirement, building an emergency fund, or getting your little one financially ready for adulthood themselves; there’s an ISA for most saving and/or investing goals, and we hope this article has helped narrow it down for you.
*The ISA allowance for adults has been set at £20,000 for a number of years, but it could be subject to change in the future. Lifetime ISAs are capped at £4,000 per tax year and Junior ISAs have a combined allowance of £9,000 per child spread between a Junior Cash ISA and a Junior Stocks and Shares ISA.
**In 2024/25, the Junior ISA annual allowance is £9,000.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
Please remember, with investing your capital is at risk. The value of your investments can go down as well as up, and you could get back less than invested.
Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
