What's an ISA?
An ISA is a type of savings account that lets you save free from UK tax. You won’t have to pay tax on the interest or investment returns you earn on the money you put in.
Although basic-rate taxpayers can earn £1,000 interest in any type of savings accounts without paying tax, an ISA can let you avoid paying tax on larger sums of money amassed over many years.
Your allowance refreshes each year, so it gives you the potential to build up a sizeable tax-free nest egg.
They’re also beneficial to higher-rate and additional-rate taxpayers, as their tax-free interest allowance is £500 or £0 respectively in ordinary savings accounts.
How much can I put in?
Each year you get an ISA allowance. This sets the maximum amount you can save each tax year. The tax year runs from 6 April to 5 April.
This tax year, you can save up to £20,000 in an ISA. You can choose how to use this, spreading your allowance across the different types of ISA available if you want, although some ISAs have specific limits to the amount you can put in.
You can save up to £20,000 in ISAs this tax yearSave tax free
Types of ISA
Not everyone’s eligible for all types of ISA, and the rules around each type of ISA account can change. You can only compare Cash ISAs – including Help to Buy ISAs – and Innovative Finance ISAs with GoCompare.
Basically the same as any other savings account, except for the tax-free treatment. You pay in money and earn interest on it.
As with non-ISA savings, they’re available as easy-access accounts that you can withdraw from at any time, or fixed-rate, where you commit to keeping your money in the account for a number of years. The interest rates are usually better on fixed-rate accounts.
Help to Buy ISAs
A type of Cash ISA that’s only available for prospective first-time home buyers.
The government will pay a 25% bonus on savings up to £12,000, with the bonus capped at £3,000. You can only save a maximum of £200 each month but can open an account with a lump sum of up to £1,000.
If you’re saving into a Help to Buy ISA you can’t save into another Cash ISA in the same tax year – but you can still hold existing Isa funds from previous years and add to a Help to Buy Isa.
Save or invest towards your first home or your retirement. They are only available to savers aged between 18 and 40.
You can save up to £4,000 a year and get a 25% government bonus with all the tax-free benefits of an ISA. Any money you put in a Lifetime ISA counts towards your £20,000 annual ISA limit.
You can withdraw money from a Lifetime ISA to buy your first home, when you turn 60, or if you are terminally ill with less than 12 months to live. If you withdraw or transfer money out of your ISA at any other time, you’ll pay a penalty.
Stocks and shares ISAs
Instead of saving cash you invest your money on the stock market. You can choose from a variety of investment types like funds or shares. But because your money is invested, and investment values go up and down, you could get back less than you invest.
You don’t pay tax on capital gains or income received from investments held in a Stocks and Shares ISA.
If you choose to invest, you should only do so for the long-term, to help ride out any market ups and downs. It’s generally recommended that you invest for at least five years. So if you need the money sooner, a Cash ISA may be a better fit.
Innovative Finance ISA (IFISA)
These let you use all of your ISA allowance to lend to small businesses and individuals through peer-to-peer (P2P) lending platforms.
P2P lending is not without risk. Most platforms aim to back any loans with assets which can be sold to cover if a borrower can’t repay. But there is no guarantee.
Your personal savings allowance of £1,000 interest also applies to peer-to-peer sites though, so you’ll probably need to be lending substantial sums of money before your Innovative Finance Isa becomes useful to you.
If you want to save for a child’s future, then you may want to consider a Junior ISA. Normal ISAs are only available to UK residents aged 16 and over.
The tax treatment is the same, but the Junior ISA limit is lower. This tax year it’s £4,260, which can be split between Junior Cash ISAs and Junior Stocks and Shares ISAs.
Be aware that any money paid in belongs to the child and is locked away until their 18th birthday.
Use it or lose it
Your ISA limit doesn’t ‘roll over’ to the next tax year if you don’t use itCompare ISAs
Many providers offer their best deals on new ISA accounts, meaning your previous years’ ISAs might be earning very low interest rates. Transferring to a new provider could make your savings work harder and give your tax-free savings more opportunity to grow.
So, if you’re opening a new ISA but want to add your money from previous ISAs too you’ll need to transfer. Check the ISA provider accepts them first.
It’s important to remember that if you withdraw money from an ISA, it’ll lose its tax-free status unless it’s in an account with ‘flexible’ features.
For instance, with a non-flexible ISA if you’ve paid in £10,000 in a tax year and withdrew £5,000, you could still only pay in another £10,000, not £15,000. But flexible ISAs allow withdrawals and re-deposits as long as they’re within the same tax year.
Not all ISAs have flexible features, so make sure the one you choose offers this if you think you’ll need it.
Frequently asked questions
You can't open more than one type of ISA each tax year. So, you could open one Cash ISA, one Stocks and Shares ISA and one Innovative Finance ISA in each tax year.
Apart from that restriction, there are no limits on how many you can have. So if you opened an ISA every year for 10 years, you would have 10 ISAs.
You won’t be entitled to any tax exemptions on interest from the payments that took you over your ISA limit.
HMRC should detect any errors and inform you at the end of the tax year, at which point you’ll have to pay the tax you owe.
Yes, you can transfer money from one sort of ISA to another.