Individual Savings Accounts (ISAs)

ISAs are considered to be “tax-efficient” as any interest paid into your Cash ISA is free from Income Tax. Meanwhile, there is no Capital Gains Tax (CGT) charged on any returns generated in an investment ISA.

Mitigating these benefits is the ISA allowance, which limits the amount you can contribute across all your ISAs each tax year.

ISAs also cannot be considered to be fully “tax-free” as the value in them would count towards your estate, and so could be liable for Inheritance Tax (IHT).

There are different kinds of ISAs that are designed to be used in various personal circumstances, from saving or investing your money, to loaning it, to buying your first property.

ISA providers are typically banks and building societies, although many investment platforms or stockbrokers also offer them.

You add money to your account each year, or as often as you’d like – as long as the total of your ISA contributions made in the same tax year is within the annual ISA allowance. This is currently £20,000 in the 2023/24 tax year.

Depending on the type of ISA account you use, your funds will either start to earn interest at the rate you agreed upon with the ISA provider, or you must wait for your investment to move.

ISAs are often viewed as savings accounts which is true for the most part. However, some types of ISAs are explicitly investment accounts – this means you could potentially lose value stored in some types of ISA if it is invested in the stock market.

While the funds in a Cash ISA may lose purchasing power as a result of inflation, it’s unlikely you’ll lose money.

However, with Stocks and Shares ISAs, Lifetime ISAs (LISAs), and Innovative Finance ISAs, it’s entirely possible that you could lose some, if not all, of the funds in your account if it is invested.

Remember that past performance is not a reliable indicator of future performance, and any type of investment you make carries inherent risk.

The various types of ISA accounts include:

• Cash ISA
• Stocks and Shares ISA
• Lifetime ISA
• Innovative Finance ISA
• Junior ISA

Any UK adult can open the main types of ISAs such as Cash ISAs, Stocks and Shares ISAs, and Innovative Finance ISAs.

However, there are specific criteria for who can open LISAs and JISAs.

Cash ISA

Cash ISAs are used to hold and build cash savings by earning interest on the funds in the account. Since your money grows at a given interest rate, this type of ISA works in a similar way to a normal savings account.

To open a Cash ISA you must:

• Be aged 16 or over
• Reside in the UK.

If you don’t reside in the UK, you must be a Crown servant or their spouse or civil partner.

Stocks and Shares ISA

The Stocks and Shares ISA is an investment-oriented account intended for holding investments in stocks and shares, funds, bonds, and many other investments.

To open a Stocks and Shares ISA you must be:

• Aged 18 or over
• Reside in the UK.

If you don’t reside in the UK, you must:

• Be a Crown servant or their spouse or civil partner.

Lifetime ISA (LISA)

LISAs are a type of account that must specifically be used to build funds to buy your first home or for retirement. There are both Cash and Stocks and Shares LISAs available.

To open a LISA you must:

• Be aged between 18 and 40
• Reside in the UK.

If you don’t reside in the UK, you must:

• Be a Crown servant or their spouse or civil partner.

Once you turn 50, you can no longer contribute to your LISA or receive the 25% government bonus. Despite this, your savings or investments will continue to earn interest or potential returns.

Withdrawing from a LISA

There are also specific rules stipulating how money can be withdrawn from a LISA.

You are permitted to withdraw from your LISA if you are:

• Buying your first home
• Aged 60 or over
• Terminally ill, with 12 months to live.

Any withdrawals that do not follow the stipulated conditions will be charged a 25% fee in order to recover the government’s contributions. These are known as “unauthorised withdrawals”.

Innovative Finance ISA

Introduced in 2016, the Innovative Finance ISA uses a system of peer-to-peer loans in order to earn interest on your money by lending it to other parties. These may be individuals, small businesses, or anything in between.

In order to open an Innovative Finance ISA you must be:

• Aged 18 or over
• Resident in the UK.

There are some additional criteria as to who can open an Innovative Finance ISA. Check with your provider before you open an account.

Junior ISA

Junior ISAs (JISAs) can be opened by a parent or legal parental guardian on behalf of a child up to the age of 16 to start building their savings as early as possible. You can choose between a Cash Junior ISA and a Stocks and Shares Junior ISA.

To open a Junior ISA your child must:

• Be aged under 18
• Live in the UK.

There is a separate JISA allowance, which is currently £9,000.

Your child can take control of the account from age 16, and can start making withdrawals once they turn 18.

ISAs which contribute to your allowance include:

• Cash ISAs
• Stocks and Shares ISAs (or “investment ISAs”)
• Lifetime ISAs
• Innovative Finance ISAs.

Junior ISAs (JISAs), which are tax-efficient accounts for children below the age of 18, have a separate JISA allowance. In 2022/23, this is £9,000.

Similarly, there is a limit to how many ISAs you can open in a single tax year – you are only permitted to open a maximum of one account of each type throughout the same tax year.

This would mean, for example, that you can open one Cash ISA each tax year.

The Lifetime ISA allowance

Lifetime ISAs (LISAs) do follow slightly different contribution rules.

You are permitted to contribute a maximum of £4,000 each tax year to a LISA, which counts towards your overall ISA allowance. You will also receive a government bonus totalling 25% of your annual contribution.

So, for every £100 you contribute, you will receive a government bonus of £25.

This means, by contributing the maximum allowance, you could receive up to £1,000 as a government bonus each tax year.

There are specific rules around who can open a LISA and what the money can be used for. Find out more below.

This is relevant to Income Tax as well as Capital Gains Tax and is true for all types of ISA accounts.

It’s also worth noting that income earned through an ISA does not contribute toward your Personal Savings Allowance.

If you’re keen to find a tax-efficient method of saving or investing, you may consider using an ISA product over other savings accounts.

Because you avoid paying tax on the interest or gains made in your account, this could lead people to form the opinion that ISAs are better.

However, saving on tax may not be everyone’s priority and there are savings accounts that may suit you better for reasons besides their tax-free status.

For example, an ordinary savings account could be of more use to you if you wish to make regular deposits or withdrawals to and from your account – although variable-rate Cash ISAs may also allow this.

On the other hand, you may wish to open an investment ISA, like a Stocks and Shares ISA, to potentially avoid paying Capital Gains Tax on any gains made on your investments.

As such, discerning which account is better or worse will likely be the result of your own preferences.

If you are unsure about what type of savings account to open, it could help to seek independent advice.