Finance > Saving
Individual Savings Account (ISA) Explained
An Individual Savings Account (ISA) allows you to save or invest money in a tax-efficient way. If held within an ISA, you do not pay tax on;
- Interest earned on cash
- Any income arising from your investments (e.g. dividends)
- Any profit made when you sell any of your investments
In This Article
Types of ISA
We discuss the four main types of ISAs and consider the benefits attributable to each of them below:
- Cash ISA
Cash ISAs are basically tax-free savings accounts, i.e. you don’t pay any tax on interest that you earn.
- Stocks and Shares ISA
Make investments within a stocks and shares ISA, and any returns, be it through dividends, interest or profit (capital gains) arising when you sell, are all tax-free.
- Innovative Finance ISA
Innovative Finance ISAs contain peer-to-peer loans. Essentially you lend money to an individual or business for what is usually a high rate of return. As always, due to being within an ISA, interest earned is tax-free.
- Lifetime ISA
Lifetime ISAs encourage individuals to save for their first home or retirement by offering a 25% bonus on deposits up to £4,000 per year.
The amount you can hold within your ISA, the eligibility criteria and the withdrawal policies change depending on the type of ISA. Please read our article below for more details on the different types of ISAs available.
The ISA Allowance
Each tax year (6 April to 5 April), there is a maximum amount you can pay into ISAs, this is referred to as your ISA allowance. In the 2022/23 tax year, the ISA allowance is £20,000. The allowance can be deposited into one type of account or split across accounts as long as you don’t pay in more than £20,000 across them all. So, for example, if you put £10,000 into a Cash ISA and £10,000 into a Stocks and Shares ISA, you would have maximised your allowance for the year.
Note: You can pay a maximum of £4,000 into your Lifetime ISA in a tax year, so if you do this every year, it leaves £16,000 for other ISAs.
The Benefit
You do not pay tax on ISAs; all income received or gains made within your ISA are all tax-free.
The Lifetime ISA also benefits from a 25% government bonus on all deposits up to £4,000.
How Many ISAs Can I Have?
Out of the four ISAs mentioned above, you can have any number however, you can only pay into ONE of each type per tax year. For example, if you have two Cash ISAs, you cannot contribute to both in the same tax year however, you can contribute to one Cash ISA and one Lifetime ISA in the same tax year. Collectively, these payments must not exceed the ISA allowance for that tax year!
Do I Qualify?
The different types of ISA have varying qualification criteria:
- Cash ISA – UK resident & aged 16 or over
- Stocks & Shares or Innovative Finance ISA – UK resident & aged 18 or over
- Lifetime ISA – UK resident & aged 18 or over but under 40
Examples:
As mentioned, for the 2022/23 tax year, the ISA allowance is £20,000 (our examples are based on this). However, it is important to note that this allowance refreshes every tax year and doesn’t include contributions from previous tax years or any returns you may have earned.
Example 1 – Your ISA Allowance:
You contribute to a Cash ISA, Stocks and Shares ISA and a Lifetime ISA in the same tax year. These all count towards your £20,000 ISA allowance.
Cash ISA – £5,000
Stocks and Shares ISA – £6,000
Lifetime ISA – £4,000
Total – £15,000
Remaining Allowance – £5,000
Note: The remaining allowance will be lost if it is not utilised before the end of the tax year, i.e. you cannot carry over any remaining allowance into the next tax year.
Example 2 – No tax on investment growth:
Alternatively, let’s say you put your whole allowance (£20,000) into a Stocks and Shares ISA, and your investments grow by 10% during the year – all returns are tax-free!
Stocks and Shares ISA – £20,000
Investment Growth – 10%
Total – £22,000
Remaining Allowance – £0.00
Tax Paid – £0.00
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