Finance > Saving
Types of Individual Savings Account (ISA)
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
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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. For the 2022/23 tax year, the ISA allowance is £20,000. This 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.
You also need to remember that you can only pay into one of each type of ISA each tax year. For example, you could not pay into two stocks and shares ISAs in the same tax year.
Cash ISAs
Cash ISAs are basically tax-free savings accounts, i.e. you don’t pay any tax on interest that you earn. A cash ISA is very similar to a regular savings account; however, due to the personal savings allowance, its tax efficiency might mean it is more appropriate for those that pay tax at the higher rates (see the third point below).
Things to Consider
- Whether the ISA has a fixed or variable interest rate
Like normal savings accounts, your account can be based on a fixed or variable interest rate. Fixed-rate savings are designed to lock money away for a set period of time with a pre-arranged rate of interest. Variable interest rates however, can fluctuate over time.
- How easy it is to access your cash
All cash ISAs allow you to access your money however, the penalty you incur will vary depending on the provider. Easy access ISAs are available, enabling you to access your cash without a penalty however, these may offer a lower interest rate.
- Do you actually need a cash ISA?
With the Personal Savings Allowance, you can earn interest on savings tax-free outside of ISAs (the amount depends on the level of income you earn). So really, it boils down to whether you can find a higher interest rate in a cash ISA or regular savings account.
Stocks and Shares ISAs
Invest 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. The money you put into a stocks and shares ISA can be used to buy any of the following:
- Shares in companies
- Unit trusts and investment funds
- Corporate bonds
- Government bonds
As always, there’s a risk with investing as the value of your investments can fluctuate, meaning you could end up with less money than you started with.
Things to Consider
- Choosing a provider
If you’re looking to invest within an ISA, the provider must offer this type of account. In addition, platforms will also provide varying levels of support, charge different fees and offer a different range of products, so it’s important to research which best suits your needs. Popular platforms include AJ Bell, Hargreaves Lansdown and Vanguard.
- Choosing your investments
If you’re willing to do the research, you may want to pick your own stocks and shares, building your own portfolio. Alternatively, you can opt for a ready-made portfolio or fund where the hard work has already been done for you. Again, the provider you choose will impact your available investments.
Lifetime ISAs
Lifetime ISAs can be used to buy your first home or save for retirement. You must be aged between 18 and 39 to open a Lifetime ISA.
You can pay up to £4,000 each tax year into your Lifetime ISA up to the age of 50.
The real advantage of Lifetime ISAs is that the government will add a 25% bonus to your savings, up to £1,000 per year. For example, if you put £2,000 into your Lifetime ISA, you will receive a further £500 from the government.
With the money you pay into your Lifetime ISA, you can choose to save cash or invest in the stock market (like the stocks and shares ISA mentioned above).
You can withdraw money from your Lifetime ISA for the following reasons:
- To buy your first home
- If you are aged 60 or over
- If you become terminally ill and have less than 12 months to live
Any other reason for withdrawal will incur a 25% charge. Essentially this means the government gets back the 25% bonus they gave you, plus you pay a 6.25% charge on the amount of your original deposit that is withdrawn.
Things to Consider
- You must use the savings for your first home or retirement
Certain restrictions apply when using the Lifetime ISA for your first home – check out our Guide to Lifetime ISAs for the details. If saving for retirement, you can access your funds at age 60. Withdrawing funds for any other reason will incur a penalty!
- You can opt for a Cash or Stocks and Shares Lifetime ISA
- Open a Cash Lifetime ISA, and avoid paying tax on the interest.
- Open a Stocks and Shares Lifetime ISA, and you can invest within the account, and all returns are tax-free.
Help to Buy ISAs
You can no longer open a Help to Buy ISA; however, if you already have a Help to Buy ISA, you can continue to pay into your account until November 2029.
Innovative Finance ISAs
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.
Important!
The rate of return for peer-to-peer lending is high, but so is the risk. It is best to view this as an investment rather than savings. You are NOT guaranteed your money back – be careful!
Things to Consider
- You understand the risk
- Choosing your lending firm
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