The basics of Individual Savings Accounts (Isas) - what they are, how they work, and how you can save without paying tax on the interest you make.
In simple terms, an Isa allows you to save money without paying tax on the interest you receive. There are three main types:
The Cash Isa may be suitable for short-term savings, so that you can get at your money easily, the Stocks and Shares Isa may be appropriate if you can afford to leave your money untouched for longer periods, and the Innovative Finance Isa could, perhaps, be seen as something of a halfway-house between the two.
However, with stocks and shares and with peer-to-peer your investment may go down in value as well as up and there are no guarantees that you'll make a profit.
You can pay into one account of each type during the tax year, which runs from 6 April to 5 April the following year.
Different Isas have varying degrees of qualification. You must be:
The allowance is the amount the government permits you to invest in your Isa accounts during each tax year.
At the start of each new tax year (6 April) you'll receive a new allowance. If you don't use it, you lose it - the allowance can't be rolled over to the next tax year.
By using your Isa allowance each year it's possible to accumulate a significant amount of tax-efficient savings.
While you should consider interest rates on other non-Isa savings and current account products, remember that the longer you have your money in an Isa, the longer it will benefit from the tax-free rules.
In the 2017-18 tax year, individuals can invest up to £20,000 a year in a Cash Isa, a Stocks and Shares Isa, an Innovative Finance Isa, or any mixture of the three - you can save the entire £20,000 in cash if you so wish.
Remember that you're only able to open a maximum of one Cash Isa, one Stocks and Shares Isa and one Innovative Finance Isa each tax year. Once open you can transfer money between these different types of Isas freely, subject to your provider's terms.
This differs from old rules where you could transfer money from Cash Isas to Stocks and Shares Isas, but not vice versa.
Note that the Help to Buy Isa that launched on 1 December, 2015, is a type of Cash Isa, meaning that if you pay into one in a particular tax year you can't also pay into another Cash Isa.
In this regard, Isas work like any other savings account - you can take money out at any time.
However, just like regular savings products some Isas may run for a fixed period or require notice of withdrawal - you may lose some interest or bonus if you withdraw early.
The launch of the 'radically flexible Isa' on 6 April, 2016, made Isas a more convenient option for savers.
Under the new flexible rules, Isa savers will be allowed to withdraw and replace money from their Cash Isa without this counting towards their annual Isa subscription limit for that year, so long as the repayment is made in the same tax year as the withdrawal.
You can easily switch your Isa provider without losing your tax-free allowance, but it's vital that you transfer the Isa rather than withdrawing the money to open a new account.
You can, for example, transfer one Cash Isa to another, something you may want to consider to obtain a better interest rate.
The Financial Conduct Authority (FCA) is working on proposals for a guaranteed seven-day switch period for a Cash Isa. It plans to have this in place by January 2017 for all but the smallest Isa providers.
Within a tax year you're only able to transfer the whole of your annual Isa to a new provider. Amounts from previous years may be transferred as a whole or in parts as you wish, but you should be aware that not all Isa providers will allow part transfers.
On the death of an account holder, Isa funds become part of the estate for inheritance tax purposes.
A spouse or civil partner can inherit Isa tax advantages and is able to invest as much into their own Isa as their spouse used to have, on top of their usual allowance.
|Cash Isa||Stocks and Shares Isa|
|Eligibility||Must be 16+||Must be 18+|
|Suitability||Suitable for most savers||Only suitable for those who accept that they may not get back the full amount they have invested|
|2016-17 allowance||£20,000 (less if you also open a Stocks and Shares Isa)||£20,000 (less if you also open a Cash Isa)|
|Risk||No risk to capital – the value of the investment will stay the same or increase||Always involves an element of risk – the value of the investment can down as well as up|
|Returns||Limited returns||Unlimited returns|
|Length of investment||Good for both short- and long-term saving||Suitable for long-term investments of at least five years|
The type of product that's right for you will depend on your personal circumstances, what you wish to achieve from the investment and your overall attitude to risk.
Remember: If you're in any doubt you should consult an independent financial adviser.
The Isa allowance increased to £10,200 (with up to £5,100 in a Cash Isa) for investors aged 50 or over on 5 April, 2010. This meant that even investors aged 49 qualified, providing they turned 50 on or before 5 April, 2010.
The Isa allowance increased to £10,200 (with up to £5,100 in a Cash Isa) for all investors.
The Isa allowance increased to £10,680 (with up to £5,340 in a Cash Isa) for all investors.
The Isa allowance increased to £11,280 (with up to £5,640 in a Cash Isa) for all investors.
The Isa allowance increased to £11,520 (with up to £5,760 in a Cash Isa) for all investors.
The Isa allowance increased to £11,880 (with up to £5,940 in a Cash Isa) for all investors
The 'Isa' allowance increased to £15,000 for all investors and accounts became 'New Individual Savings Accounts' (Nisas). The rule placing a limit on the amount that could be invested in cash was abolished, meaning savers could invest the full £15,000 in cash accounts if they so wished. Transfers from Stocks and Shares Nisas to Cash Nisas were allowed, as well as the reverse.
The government reverted from calling the accounts 'Nisas' and again began using Isas. If an Isa saver in a marriage or civil partnership dies, their spouse or civil partner will inherit their Isa tax advantages.
The Isa allowance increased to £15,240. Surviving spouses able to invest as much into their own Isa as their spouse used to, on top of their usual allowance. Eligible Isa investments include listed bonds issued by a co-operative society and community benefit society and SME securities issued by companies trading on a recognised stock exchange.
A new type of Cash Isa launched, the Help to Buy Isa.
Radically flexible Isas launched, allowing Isa savers to withdraw and replace money from their Cash Isa without counting towards their annual Isa subscription limit for that year, so long as the repayment is made in the same tax year as the withdrawal.
Innovative Finance Isas (for loans arranged via a peer-to-peer platform) available.
The annual Isa limit rises to £20,000.
A fourth type of Isa launched the Lifetime Isa, designed for those saving for their first house or for retirement.