What Is an Individual Savings Account (ISA)?

Updated On: Nov 27, 2023
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Halimah Omogiafo
Author: Halimah Omogiafo
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What is an ISA


What Is an ISA?

An ISA or Individual Savings Account is a savings or investment account you do not pay tax on. This means that any interest or dividend you earn on your savings or investments is tax-free. ISAs are open to adults living in the UK and this tax year, you can save or invest up to a maximum of £20,000.

There is a new ISA limit every tax year, although it has remained unchanged since 2017. The tax year starts on the 6th of April and ends on the 5th of April the following year. 

If you do not live in the UK and would like to open an ISA, you must be a Crown servant (for example, diplomatic or overseas civil service) or their spouse or civil partner.

Types of ISAs

There are four main types of ISAs that you can put money into each tax year. They include a Cash ISA, Stocks and Shares ISA, Lifetime ISA and Innovative Finance ISA. There is also an ISA for children called a Junior ISA.

Here is a breakdown of how each ISA works:

1. Cash ISA

A Cash ISA is a savings account with no taxes. It is open to UK residents aged 16 or over. Cash ISAs can be used for savings in bank or building society accounts and certain National Savings and Investment products. They are just like ordinary savings accounts in this way, where you deposit cash and it accumulates interest. The only difference is that you do not pay taxes on the interest earned on your savings in a Cash ISA.

2. Stocks and Shares ISA

A Stocks and Shares ISA is an investment account with no taxes. It is open to UK residents aged 18 or over. Stocks and shares ISAs can be used to invest in qualifying assets such as shares, corporate bonds, government bonds (gilts) and funds. Any interest or profits from your investments held in a stocks and shares ISA are tax-free. Whilst this type of ISA can potentially lead to faster or bigger returns, the fact that they are investments in the stock market means there is a risk that your capital might decrease.

3. Lifetime ISA

A Lifetime ISA is open to adults aged 18 or over but under 40 and lets you save up to £4,000 a year towards your first home or retirement. The government will add a 25% bonus to your savings every year up to a maximum of £1,000 per year. Lifetime ISAs can be used either for cash or stocks and shares.

4. Innovative Finance ISA

An Innovative Finance ISA is open to UK residents aged 18 or over and allows you to put your savings towards:

  • Peer-to-peer loans - loans you give to other people or businesses without using a bank.
  • Crowdfunding debentures - investing in a business by buying its debt.

You cannot transfer any peer-to-peer loans you've already made or any existing crowdfunding debentures into an Innovative Finance ISA.

5. Junior ISA

A Junior ISA is a tax-free savings or investment account for children under 18 residing in the UK. The Junior ISA allowance for this tax year is £9,000, and both friends and family can pay into the ISA on behalf of the child. Children aged between 16 and 18 can hold both a Junior and a standard Cash ISA.

Who Can Open an ISA?

To open an ISA, you must be a UK resident. If you do not reside in the UK, you must be a Crown servant or the spouse (or civil partner) of a Crown servant. 

For a Cash ISA, you must be 16 or older; for a Stocks and Shares or Innovative Finance ISA, you must be 18 or older; and for a Lifetime ISA you must be under 40 but at least 18 years old. While you cannot open an ISA with or for another person, you can open a Junior ISA for children under 18.

Transferring Your ISA

You can transfer an existing ISA into a new ISA, and you can transfer money from one ISA to another at any point in time. The best way to transfer your ISA is by informing the new provider of the transfer and completing a transfer form.

If you plan to take money out of your ISA and put it back during the same tax year, make sure you put your money in a flexible ISA. Flexible ISAs allow you to withdraw cash from your ISA and put it back in the same tax year without reducing your allowance. 

For example, say you put £16,000 in a Cash ISA in one tax year. If the ISA is flexible and you withdraw the £16,000, you can put it back into the ISA later in the same tax year. If the ISA is not flexible, you won't be able to put the £16,000 back into the ISA as you'd have used up that bit of your allowance. You will only be able to put in £4,000, which is the remainder of your allowance. Many providers offer flexible ISAs but are not required to, so be sure to check before you buy.

There are different rules for taking your money out of a Lifetime ISA (LISA). If you withdraw your money from a LISA without using it to buy your first home or for retirement, you'll lose the 25% bonus.

Are ISAs Worth Having?

Yes, ISAs are worth having especially if you have larger savings that fall outside your personal savings allowance or want to earn tax-free interest over a longer period of time.

1. Is an ISA better than a savings account?

Whether an ISA is better than a savings account depends on your needs. The advantage of an ISA is that it allows you to save or invest up to £20,000 tax-free, whereas a savings account will only allow you to earn an interest of up to £1,000 tax-free for basic rate taxpayers or £500 for higher rate taxpayers. However, a savings account will typically offer better interest rates, and there is no limit to the amount you can deposit or how many accounts you can open. Thus, those who wish to save larger amounts long-term may prefer an ISA, whereas those who want to save smaller amounts or over a shorter period may benefit from a savings account.

2. How many ISAs can you have?

You can have multiple ISAs, but you can only open one of each type per tax year.

3. Can I withdraw money from an ISA?

Yes, you can withdraw money from your ISA at any time without losing tax benefits but depending on the terms of your ISA, there may be charges for making withdrawals or specific rules that need to be complied with.

If you have a flexible ISA, you can withdraw cash and put it back in during the same tax year while maintaining your allowance for that year.

4. How much can I put into an ISA?

You can deposit as little or as much money as you want into your ISA up to a maximum of £20,000. The maximum you can pay into a Junior ISA in one tax year is £9,000.

5. What happens to an ISA after a year?

Your ISA will not close at the end of the tax year. You'll keep your savings on a tax-free basis for as long as you keep the money in your ISAs. This means your ISA stays tax-free yearly, and you can keep adding more cash up to the limit each tax year.

6. How do I open an ISA?

To open an ISA, please visit a financial institution such as a bank, building society, credit union, friendly society, stockbroker, fund supermarket, peer-to-peer lending service, crowdfunding company or fintech. These providers must be authorised and regulated by the Financial Conduct Authority (FCA). Note that all the providers we list on Koody are authorised by the FCA. You should contact an ISA provider directly for guidance on how to open one.

7. Can you switch ISAs?

Yes, you can switch your ISA provider and move your savings from one type of ISA to another, but this may be subject to rules made by your provider. When switching providers, do not simply withdraw your money from one provider and move it to another. Doing so will cost you all the tax-free benefits. Instead, inform the new provider of the transfer and fill out a transfer form. Your new provider should sort it out, including moving the money to your new ISA.

8. How many ISAs can I open in a tax year?

You can only open one of each type of ISA in a single tax year. This means that an adult living in the UK can have up to four ISAs each tax year.

9. What are some of the best Stocks and Shares ISAs in the UK?

Here are some of the best Stocks and Shares ISAs in the UK:

  1. Interactive Investor - One free trade per month; 40,000+ investments
  2. AJ Bell - Mid-price range; Lots of investment options
  3. InvestEngine - Low cost; 500+ Commission-free ETFs
  4. Bestinvest - Low cost; Lots of investment options and research
  5. Hargreaves Lansdown - Lots of investment options, research and tips

10. What are some of the best Junior ISAs in the UK?

Here are some of the best Junior Stocks and Shares ISAs in the UK: 

  1. Interactive Investor - One free trade per month; 40,000+ investments
  2. Bestinvest - Low cost; Lots of investment options and research
  3. Hargreaves Lansdown - Lots of investment options, research and tips
  4. Moneyfarm - Mid-price range; Offers advice and ESG investments
  5. Wealthify - Mid-price range; Offers ethical themes; Beginner-friendly

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