What is an ISA and how does it work?
An ISA is a type of savings account that lets you grow your money tax-free.
ISAs are a little different to other savings accounts, as there's a limit on how much you can save each tax year, but the biggest perk is that the interest you earn is free from tax.
Each person has an annual ISA allowance that they can save tax-efficiently in one or more types of ISA. The ISA allowance for this tax year is £20,000.
If you’re looking to make the most of your savings by keeping more of the interest you earn, an ISA could be right for you.
What are the different types of ISA?
There are five types of ISA:
- Cash ISA
- Stocks and Shares ISA
- Lifetime ISA
- Innovative Finance ISA
- Junior ISA.
We offer a variety of Cash ISAs, including an Easy Access Cash ISA, a Junior Cash ISA and a Cash Lifetime ISA (LISA). We also offer financial advice on investing in Stocks and Shares ISAs.
Below you can find details on each type of ISA to help you decide which one best suits your goals.
What is a Cash ISA?
Cash ISAs are similar to a traditional savings account. However, they provide you with the added benefit of not paying tax on the interest you earn – meaning you keep more of your money.
There are different types of Cash ISAs for you to consider:
Easy Access Cash ISA
- Perfect for short-term savings goals or if you need easy access to your money.
- They pay a variable rate of interest.
- As our Easy Access Cash ISAs are flexible ISAs, you can withdraw money and replace it later without it affecting your annual allowance, as long as it’s done in the same tax year and the account remains open.
For example, if you’ve already paid £10,000 into your Easy Access ISA during the current tax year, you can withdraw £5,000 and still pay in another £15,000 before you reach your annual £20,000 limit.
Easy Access Cash ISAs
Fixed Rate Cash ISA
- Ideal for longer-term goals and if you don’t need immediate access to your money.
- Tend to receive a higher rate of interest in exchange for committing your money for a fixed period.
A Fixed Rate Cash ISA could be ideal for savers who have a lump sum to pay in and don’t need access to their money before the end of the term as they’re saving for the future. Often with these accounts, if you close your account early, you're likely to incur an interest penalty so you may get back less than you paid in.
Fixed Rate Cash ISAs
What is a Lifetime ISA?
Lifetime ISAs (LISAs) are a great option for first-time homebuyers or retirement savers aged 18-39. Some of the benefits include:
- You can save up to £4,000 a year tax-free until you’re 50.
- You get a government bonus of 25% on what you save, up to £1,000 per year. That’s free money to jump start your savings!
There are some important things you should know about LISAs:
- There’s a 25% government charge for withdrawals within the first 12 months of your first payment into a LISA. This would mean you could get back less than you paid in.
- After 12 months of making your first payment you can withdraw money to buy your first home without paying the government withdrawal charge.
- Withdrawals for anything other than buying a first home before the age of 60 also incur a 25% charge (unless you’re diagnosed with a terminal illness).
- Your LISA allowance counts towards your overall ISA allowance (£20,000 for this tax year).
Cash Lifetime ISA
What is a Stocks and Shares ISA?
Thinking about your long-term future? A Stocks and Shares ISA could be a powerful tool for making your money go further and helping you to reach your financial goals. They allow you to invest tax-efficiently, potentially earning higher returns than a traditional savings account.
Important information
Stocks and Shares ISAs are for long term goals - you need to be able to commit your money for at least five years. These aren't like bank or building society savings accounts as your money is at risk and you may get back less than you invested. The tax treatment of investments depends on your personal circumstances and tax rules may change in the future.
If you’re interested in investing in a Stocks and Shares ISA, our expert financial advisers could help you find a solution that suits your circumstances and attitude to risk.
Stock and Shares ISAs
What is a Junior Cash ISA?
A Junior Cash ISA is an ISA for young people under the age of 18. Here’s what you need to know about Junior Cash ISAs:
- Each tax year you can save up to £9,000 per year tax-free into a Junior Cash ISA.
- Parents or guardians can open a Junior Cash ISA for a young person at any time. A young person can open their own Junior Cash ISA from the age of 16.
- A child can access the money when they turn 18 – the money held in a Junior ISA transfers to an Easy Access Cash ISA for adults.
Junior ISAs are a great way of teaching children the value of saving from a young age. They allow them to watch their savings grow over time and provide them with a financial head start for when they reach adulthood.
Junior Cash ISA
What are the benefits of having an ISA?
While the Personal Savings Allowance (PSA) lets you earn some interest tax-free, Cash ISAs come with the following benefits:
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Tax-free interest
Saving into an ISA means you keep more of your hard-earned savings, regardless of how much you’ve saved in ISAs over the years. Whereas if your savings aren’t held in a Cash ISA and you exceed your PSA, you’ll pay tax. You can also pass on your unused allowance to your spouse or civil partner when you die. This can be used as an additional tax-free allowance.
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Future-proof your savings
If interest rates increase or you have more money to save at a later date, this could mean you exceed your PSA and end up paying tax. You might be able to avoid this by saving into an ISA.
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Tax-free savings for higher earners
If you're an additional-rate tax payer, you're not eligible for a PSA. But you can still earn interest on your savings tax free with a cash ISA.
Tax rules may change in the future, for more information visit the Tax on savings interest page on Gov.uk.
How much can you save into an ISA?
The amount you can pay into your ISA has changed over the years. The ISA allowance for this tax year is £20,000.
This means you can save up to £20,000 in total across all of your ISAs in a single tax year.
However, there may be limits on how much you can contribute to specific types of ISA, such as the £4,000 annual allowance for LISAs.
Find out more information on ISA allowances to ensure you’re choosing the right ISA for your savings goals.