The big guide to ISAs

An ISA is a tax-free account for cash and investments. Learn how they work and what the different types are – including cash, Lifetime, and stock and shares ISAs.

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What is an ISA?

Why use an ISA?

Can I have more than one ISA?

How does the ISA allowance work?

Withdrawing money – how does it affect my allowance?

Types of ISA – comparison table

Cash ISA

Easy access ISA

Regular saver ISA

Fixed-rate ISA

Lifetime ISA

Innovative finance ISA

Stocks and shares ISA

An ISA is a type of savings account. You can earn interest, dividends and capital gains from an ISA without ever being taxed.

The amount you’re allowed to pay into an ISA is limited by the UK government – the current allowance is £20,000 per year.

One of the main attractions of an ISA is that you’ll never be taxed on interest.

But this isn’t the advantage it used to be, as the government introduced a personal savings allowance on all savings accounts in 2016. This means that – no matter what savings account you use – you won’t be taxed on the first £1,000 of interest if you’re a basic rate taxpayer, or the first £500 if you’re a higher rate taxpayer. After this, you’ll pay tax at 20% or 40% respectively.

With this in mind – and the fact that many ISAs have low interest rates – it’s worth considering other types of savings accounts before putting your money away.

But an ISA can still come in handy, for example if:

The government will boost your savings with a Lifetime ISA. We explain how these work in more detail below.

You won’t have a personal savings allowance if you pay income tax at 45%. In this case, an ISA is the only type of savings account where you can earn tax-free interest.

A lot of people won’t go over their allowance. But it’s best to check, especially if you have a large amount of money or a high interest rate savings account.

Bear in mind that many ISAs have a low interest rate, so you may be better off with a high-interest account even if you have to pay tax. Just remember, it’s your responsibility to tell HMRC if you go over your personal savings allowance.

Yes – the government allows you to have as many as four different types of ISAs each year:

Interestingly, some providers have found a loophole to this rule and will let you open multiple cash ISAs with them. Also, the rule only applies to ISAs you’re currently paying into – you can open a new ISA of the same type each year with a different provider. The old one can simply sit there and earn interest.

Remember, it’s sensible to save no more than £85,000 with the same provider. Anything over this won’t be protected by the Financial Services Compensation Scheme.

Your ISA allowance is reset at the start of each tax year (on 6 April). The government may decide to adjust it or keep it the same.

For example, here’s how the ISA allowance has changed over the past five years:

Your ISA allowance works on a ‘use it or lose it’ basis, meaning you can’t roll unused allowance over to the next year. Any money arriving in your ISA after 5 April counts toward the new tax year’s allowance, so leave plenty of time for transfers and payments.

You don’t get a seperate allowance for each ISA – the allowance is per person, not per account. But it’s your choice how to split the allowance across different ISAs.

For example, you might pay £15,000 into a cash ISA and £5,000 into an innovative finance ISA. (Note that Lifetime ISAs have their own annual limits, which we look at in more detail below.)

Some ISAs let you withdraw money. But this doesn’t change your current ISA allowance. So, if you pay money into your ISA and withdraw it in the same year, your ISA allowance will go down but you’ll have nothing to show for it.

Here’s an example: say you put £5,000 into an ISA. This eats into your £20,000 allowance for the current tax year, meaning your remaining allowance is £15,000. But if you take the £5,000 out again, your allowance won’t go back up to £20,000.

Note that flexible ISAs are an exception to this rule – these accounts let you withdraw and replace money in the same tax year without wasting your allowance.

It’s also useful to know you can switch or transfer between ISAs without withdrawing the money yourself, so that your allowance is protected.

Here’s a side-by-side comparison to help you get your head around the different types of ISA. Just remember, this information is only a guide – you should always research accounts yourself before applying for one.

We’ve explored each of these types of ISA in more detail below.

Cash ISAs are relatively straightforward compared to the other types of ISA. There are four main subtypes:

All cash ISAs must let you access your money whenever you want, but many providers charge a hefty fee. Easy access ISAs are generally designed to let you withdraw your savings without being penalised.

You’ll usually get a cash card for the account, or have it linked to an existing card with the same provider. Just remember, paying money in and taking it out again will waste your ISA allowance (unless the account is flexible).

A regular savers ISA may offer higher interest rates. You’ll need to pay in a certain amount every month – how much and for how long depends on your agreement with the bank. Your rate may go down if you miss a payment or take out money.

Fixed-rate ISAs are designed to lock your money away for a set period (often a year or more). As mentioned above, providers can’t legally stop you from accessing your money – but there are usually harsher penalties for withdrawing from a fixed-rate ISA.

The advantage to fixed-rate ISAs is that they tend to offer higher interest rates. So, you may find them quite rewarding if you can commit to leaving your savings alone for a while.

A Lifetime ISA – also called a ‘LISA’ – is designed to help you save for your first home or retirement (or both if you like). The Lifetime ISA is a government scheme that tops up your savings by 25%. But the LISA has a couple of advantages. For example, you can pay in up to £4,000 per year. There’s no monthly limit, so you can deposit it all in one go if you like.

You can also earn more in government bonuses with the Lifetime ISA. Each year your savings can be topped up by £1,000 and you can keep earning the 25% bonus until you’re 50.

A Lifetime ISA also allows you to buy more expensive property outside London. You can use your bonus to purchase a home up to £450,000 anywhere in the UK. What’s more, you should have no issues using your LISA savings to pay the deposit before exchanging on a house.

You can pool your Lifetime ISA savings and bonus with someone else’s if you’re buying a home with them. You must both:

One potential risk of getting a Lifetime ISA is you’ll pay a 25% charge if you withdraw money for an unapproved purpose (i.e. something that isn’t buying your first home or taking money for retirement). This means you’ll actually lose money.

Here’s an example: say you save £4,000 in your LISA and the government tops it up by £1,000. This gives you a total of £5,000. If you withdraw this money early and have to pay the charge, you’ll lose £1,250. This leaves you with £3,750 – which is £250 less than what you put in. So, it’s sensible to only get a Lifetime ISA if you can commit to its criteria.

Here are a few more things to consider before getting a Lifetime ISA:

When you save with an innovative finance ISA, your money will be lent to other people or organizations. This type of ISA is often thought of as a halfway house between cash ISAs and stocks and shares ISAs. You may have the potential to earn more, but there is a chance that the borrowers won’t repay your money. Your cash will be spread across multiple loans to reduce risk.

When you put money in a stocks and shares ISA, you’re investing it. This means there’s a higher risk of losing your money than with a cash ISA, but there may also be the potential for higher rewards. You’ll usually invest in one or more of the following:

Bonds usually pay interest, which counts towards your personal savings allowance. But interest on bonds is always tax-free if you earn it through an ISA.

With shares, there are generally two ways to make money: by selling them and through dividends.

Dividends are a portion of the company’s profits that it splits among its shareholders (i.e. the people who own its shares).

There’s a separate allowance for this, called a dividends allowance. Currently, the first £2,000 you make is tax-free. After that, you’ll be taxed at 7.5%, 32.5% or 38.1% depending if you’re a basic, higher or additional rate taxpayer. But once again, this doesn't apply to stocks and shares ISAs – any dividends gained through one of these are tax-free.

If you sell your shares, the money you make is called ‘gains’. You normally have to pay capital gains tax on gains over £11,700 per year. But – you guessed it – you don’t pay capital gains tax on gains made through an ISA.

Stocks and shares ISAs are normally managed by a third party, such as an online service or fund management group. They may charge you a fee to open and use a stocks and shares ISA, including for things like withdrawing your money or changing your investments.

We hope this guide has answered your questions about ISAs and how they work. Feel free to comment below with more questions or suggestions! Next, you might like to learn about interest or savings accounts.