Your guide to ISAs

What is an ISA?

ISA stands for individual savings account. Unlike a standard savings account with your bank, an ISA allows you to hold cash or investments without having to pay tax on interest, dividends, or gains.

Some ISAs have specialist features, such as bonuses for buying a home, or being designed for saving for children. There are limits on how much you can put away each year, and you have the option of variable or fixed interest rates.

How much can you save into ISAs?

There is a limit to how much money you can place into ISAs each tax year. You can invest up to this limit in any combination of ISA types (e.g. cash, stocks & shares, innovative finance).

Remember the allowance renews every tax year, so if April is approaching and you have some spare cash, always see if you have some ISA allowance to use up.

For the 2024/2025 tax year, the ISA allowance is set at £20,000. However, be aware that some ISAs, such as the lifetime ISA and junior ISA, have different annual limits.

What are the different types of ISAs?

There are several different types of ISAs, each one designed for a particular kind of saving or investing.

Some ISAs come with special advantages and/or certain conditions of saving, while others may have particular risks associated with them.

The types of ISA available are:

• Cash ISA
• Stocks & shares ISA
• Innovative finance ISA
• Lifetime ISA
• Junior ISA

What is a cash ISA?

A cash ISA allows you to save money without having to pay tax on any interest that you accumulate on your savings. This is in addition to your tax-free personal savings allowance.

There are three types of cash ISA:

• Instant access cash ISAs allow you to withdraw your money at any point throughout the year, but may have lower interest rates than other types, and the interest rate may change over time.
• Fixed-rate cash ISAs give you a guaranteed rate of interest for an agreed period of time.  However, you may face a penalty if you want to access your money before the end of this period.
• Regular savings cash ISAs enable a fixed interest rate over an agreed period of time, as long as you put money into your ISA every month and do not withdraw the cash during this period (there is usually a penalty if you do).

What is a stocks and shares ISA?

Bonds and equities are more risky than cash, but can deliver greater returns over time. If you want to invest in such assets, then consider a stocks & shares ISA. You will not pay any tax on any capital gains or income from investments kept in this ISA.

Shopping around for a stocks & shares ISA is a more complex process, as first you have to choose the provider (platform) and then you have to choose which funds to invest in.

A financial adviser can be a great help here. You should also compare the administrative charges of different providers.

Remember that your investments can go down as well as up. This kind of ISA is best suited to longer-term investments.

What is an innovative finance ISA?

This type of ISA is also known as a peer-to-peer ISA (P2P ISA), as they are provided by peer-to-peer lending firms. It allows you to earn from lending out P2P loans and pay no tax on the income generated.

P2P loans are available online via a number of providers. They enable you to lend out your money to individuals or businesses and earn interest from the repayments. As there is no ‘middleman’, these loans can offer higher interest to savers the mainstream market.

P2P lending comes with a higher risk than cash saving, so discuss it first with your financial adviser.

What is a help to buy ISA?

Exclusively for first-time buyers, help to buy ISAs were designed to help save a deposit for a first home.

You can no longer open a help to buy ISA, but you can continue to pay into an existing one. If you opened your ISA with an initial lump sum of up to £1,000, you can continue to save up to £200 per month (so in the first month, you can deposit £1,200 in total).

You can miss monthly deposits but you can’t roll them over, so the maximum you can pay in is always £200.

You can save up to £12,000 in total (deposits plus interest), and when you complete the purchase of your first home, the government adds a bonus of 25% (so a £12,000 ISA is boosted to £15,000).

If you choose not to buy a home you can still take the money you saved up, but you won’t get the 25% bonus.

Find out more about help to buy schemes.

What is a lifetime ISA?

A Lifetime ISA (LISA) lets you save for a deposit on your first home, for retirement, or both.

You can open one between the ages of 18 and 40, paying in up to £4,000 per year, to which the government adds a 25% bonus (to a maximum total bonus of £32,000 by the age of 50).

Your savings-plus-bonus can be withdrawn to be used as the deposit on your first home, or from the age of 60. If you withdraw the money for any other reason, you must pay a 25% penalty.

To qualify for the bonus, the home you buy must cost under £450,000.

Find out more about how to use a Lifetime ISA to save for a home.

What is a junior ISA?

This works the same way as other ISAs, but is specifically designed for children. You can open a junior ISA for your child at any point, putting away up to £9,000 each year.

Your child can then access the ISA once they turn 18, and will no tax on the proceeds. Junior ISAs hold either cash or stocks & shares or a mixture of the two.

Talk to a financial adviser about the best option for your child’s long-term investment.

Find out more about saving for children.

Can you inherit an ISA?

If your spouse has an ISA and they die, then you inherit not just the money itself but also an additional ISA allowance, equal to the total value of all ISAs they held at the time.

This allows you to reinvest the money in your own ISAs in that tax year, without losing its tax-protected status.

You can find out more about inheritance and also flexible ISAs here.

Get expert financial advice

Individual savings accounts provide a unique way to invest cash without having to pay additional tax on interest, gains, or dividends earned.

There are many types of ISAs available, including those that offer bonuses for home purchases or allow money to be saved for children and minors tax-free.

Each type of ISA has its own annual contribution limits and gives you a choice between fixed and variable interest rates to help you maximise your returns on your ISA savings.

Let Unbiased connect you with an expert financial adviser who can recommend the best types of ISAs to meet your and your family’s saving needs.