On this page, you’re going to discover all about ISAs – how you can pick the best ISA no matter what your needs are and earn tax-free interest, the different types of ISA’s and how to get your money in and out of these ISAs.
What is an ISA?
ISA stands for Individual Savings Account and a cash ISA is essentially a tax-free savings account. They are very similar to other types of savings accounts you can get from various providers and banks. These special types of savings accounts have become more popular in recent years and in 2018 cash ISA products reached a six-year high – thanks in part to new products from all of the challenger banks that are popping up.
These cash ISAs are similar to savings accounts like those offered by banks on the high street. Typically, a high street bank will offer higher interest rates on a savings account than a cash ISA, and in order to secure the best ISA rates you are better off putting your money into a fixed rate ISA or some form of limited access ISA – don’t worry, we’ll talk more about these different ISA accounts in a second!
Cash ISA products are deemed low-risk because the interest is guaranteed. Within cash ISAs you’ll earn according to the product you choose and the interest rate offered. You should be able to calculate exactly how your ISA account will grow, which is ideal for those looking for stability as well as a small return on their investment. Remember that a savings account can offer a higher interest rate and therefore better returns should you be within the personal allowance.
A cash ISA is also subject to the annual ISA allowance of £20,000 for the 2020/21 tax year and this annual ISA limit is set to remain for the next tax year of 2021/22.
Best ISA Offers for 2022/23
With ISA season well and truly underway, here are the best ISA offers for new accounts and ISA transfers for the new tax year 2022/23.
- Transfer existing ISAs for free
- Zero ISA account fees
- £25 Welcome Bonus when you invest £100 (T&Cs apply)
*Bonus will be paid after after an initial investment of at least £100 in a single portfolio. With investment, your capital is at risk. This could mean the value of your investments goes down as well as up.
Best ISA provider
- The number one choice for stocks and shares ISA
- Open an ISA account for £9.99
- Contribute as little as £25 per month
Important information - investment value can go up or down and you could get back less than you invest. If you're in any doubt about the suitability of a Stocks & Shares ISA, you should seek independent financial advice. The tax treatment of this product depends on your individual circumstances and may change in future. If you are uncertain about the tax treatment of the product you should contact HMRC or seek independent tax advice.
The Different Types of ISAs
Now that you’ve had a quick rundown about what an ISA is, let’s get into the different ISAs that are available and which one might be best for you.
Regular savings ISAs
If you just want to deposit a smaller amount every month instead of making one big lump sum, regular savings ISAs may be the type of ISA for you. The most common duration terms you’ll come across is between 1 year and 5 years, with the longer terms you’ll probably get a better interest rate. If you wish to get your hands on your fixed-rate ISA funds before the term expires though, be warned: You will often have a penalty on your interest and your ISA may be closed by the provider.
Notice ISAs are a kind of go-between for easy access ISAs and fixed-rate ISAs. These offer some flexibility akin to the easy access kind as you don’t have to lock your money away for a certain amount of time. But you can’t get your hands on your funds immediately – you need to give the provider notice.
This notice can be anywhere between 30-120 days, with some providers asking for 180 days notice. Because of this notice period, you will often find this type of ISA having a larger interest rate than easy access ISAs.
This type of cash ISA is specifically aimed towards helping you save money for your child and their future. The child in question must be under the age of 18 and live in the UK – there are a few exemptions to this last rule though.
Until the child is 16 you will have responsibility for their account and the child won’t be able to withdraw any money from their account until they’re 18. Junior ISAs come as both cash ISAs and also stocks and shares ISAs.
Stocks and Shares ISA
For those looking for more potential growth on their savings, the stocks and shares ISA provides tax-free returns on investments that are usually in the form of a fund.
Remember investments can go down as well as up and you could get back less than your original investment.
Easy Access ISA
As the name suggests, this is a flexible cash ISA that will let you pay in money and withdraw it whenever you want to, allowing you a great amount of flexibility. One thing to keep a note of with easy access ISAs is the fact that taking money out of the account and then depositing it again means that you could run the risk of losing the tax-free allowance on the money in there!
For example, if you needed to withdraw £1,000 from an easy access ISA, but then realised you wanted to put it back into the account, you’d have to wait until the next tax year to deposit your money back in. If you aren’t likely to need whatever money you deposit into the easy access ISA that tax year, then it could be a good option for you.
Many easy access cash ISAs offer unlimited withdrawals – but a few providers will limit the number of withdrawals you can make over the year. Quite a few ISA providers will also offer new customers a short term boosted rate which usually lasts around 12 months. Remember that If you take one of these boosted cash ISAS, check to see if the interest rate is still competitive after the bonus period is over.
A fixed-rate cash ISA offers a locked rate of interest that is often higher than that of an easy access one. These accounts are designed for you to lock money away and pretty much forget about until they mature and offer some form of security when it comes to the interest rate amount you can get.
The law around cash ISAs states that you have to be able to get access to your money. Whilst this is possible with fixed rates ISAs, withdrawals before the maturity date can have penalties. These can include you having to close the account and even up to 365 days worth of interest!
How to choose which type of ISA is for you
Because ISAs are a form of investment, making sure you have the right type of ISA for your needs is very important. Some of the things you want to take into consideration when choosing which type of ISA you want. These include:
What type of access do you want to the account?
Depending on what type of access and how easily you want access to your investment is a big factor in what type of ISA could be right for you. Fixed terms ISAs will offer you the best rates – often better than a standard savings account – but this comes at the cost of having to lock your money in for a set period of time. If you’ll need to get your hands on the money early then you can face penalties.
The instant access cash ISAs have much more leeway when it comes to withdrawing your funds, at the cost of a reduced interest rate. If you want easier access to your money, then the instant access ISA could be a better option for you.
The Rates of the ISA
Just like comparing savings accounts, Once you have figured out what type of ISA you want, then the next aspect to take into consideration is the rates of interest and compare them. You don’t just want to do this when you’re first opening your account to invest though – you should be regularly comparing rates.
You want to make sure your rates stay competitive and shopping around is the key to this. You can transfer your ISA as often as you want, so it pays to keep checking that you’re getting a good interest rate!
Check for withdrawal fees
With an easy access ISA, you usually get unlimited withdrawals with no fee. But if you’ve decided to go for a fixed-term cash ISA and hope to see through the full term of the account, emergencies, where you need to get your hands on the cash, can cause a problem. With these kinds of ISAs, if you withdraw your cash before the end of the term, then you’ll likely be hit with a fee to withdraw any money.
This penalty fee can eat away at any interest you’ve earned, making the time you’ve spent accruing interest pointless! Make sure you read up on these fees if you’re looking at fixed rate cash ISAs fixed rate ISA.
Pros and Cons of ISAs
Saving your money in one of these cash ISAs has a great range of benefits – but it also has a few drawbacks that you should take note of as well.
Pros of an ISA:
You don’t pay tax on any interest you earn
This is one of the most prominent reasons people use cash ISA accounts. Any interest you earn on the funds in your account will be totally yours to keep. This is one of the best ways you can make the most out of your savings with minimal risk.
Great flexibility when you switch
One big advantage of a cash ISA is the fact that you can switch your provider when you like and as many times as you want. This enables you to take advantage of competitive rates at all times. But it doesn’t stop there, you can also switch the type of ISA that your funds are in, offering a totally new level of flexibility.
The accounts don’t cost anything
Whilst also being able to earn interest on your money tax-free, cash ISAs are also totally free. You won’t have to pay any sort of monthly charges like you may find on current accounts or savings accounts.
There’s no age limit
Children under the age of 16 can get a junior ISA opened in their name and there’s no upper age limit for opening an account. This makes it a viable option for anyone!
Cons of an ISA:
Takes time for the best returns
Whilst the fact that the interest you earn on these accounts is free from tax if you want to get your hands on the best interest rates you’re going to have to tie up your money into a cash ISA with long fixed-rate terms. This isn’t ideal as you’ll get less access to the money you put in. Whilst you can get instant access ISAs, they often have lower rates of interest.
Early withdrawals can be a problem
If you’re on one of the fixed-rate ISAs with higher interest rates, then you can encounter penalties if you need to withdraw the money earlier than the end of the term. These penalties can include heavy fees, accounts closure or a drop in the interest rate.
Limit on how much you can deposit
Any cash ISA in the UK will have a limit on the amount that you can invest for each year. This amount currently stands at £20,000 for 2022 and is a limit per person, not per ISA.
How to open an ISA
Whether you want to open a fixed term ISA or an instant access ISA, the process of opening both is the same. The first port of call when you open an ISA is to find a platform and provider that suits your requirements and budget. You will need to go through the account opening process and use your credit card or an alternative method to make a minimum deposit which can be anything from £1 up to £20,000 – which is the current ISA allowance for 2021/22.
The process for opening the account is very simple and most providers allow the process to be done in-branch if the provider you choose has real-world locations, over the phone or even online.
Overall, the whole process works very much the same way as internet banking and most onboarding processes are quick and easy to complete. You must be a resident in the UK, over 16 and within your yearly total ISA allowance for that tax year.
You won’t have to go through a credit check or any sort of process that involves your credit, as cash ISAs aren’t a credit-related product. There’s no overdraft involved and you can’t borrow money against it – meaning your credit score isn’t involved at all.
Aside from this, you’ll need a few personal details to open up your account – such as your National Insurance number, your address and also your occupation. You’ll also need to provide some forms of ID to help combat money laundering.
What do I need to open an ISA?
Much like all internet banking, what you need to open an ISA account will depend on whether you are opening a cash ISA or a stocks & shares ISA, as well as the individual requirements of the platform you decide on. Generally speaking, you will need your name, address, National Insurance Number and deposit method such as a debit card.
Is my money safe in an ISA?
Any ISA you put your money into is covered by the FSCS (Financial Services Compensation Scheme) which is backed by the UK government. This Financial Services Compensation Scheme safely covers your money up to £85,000. This protects you in case the providers of your ISA goes bust.
If you have more than £85,000 to invest, to get the best cover from the FSCS it is probably best to spread this money across different assets or ISAs from different providers and financial institutions. Keep in mind that you can only open one ISA account per tax year!
With your standard cash ISA, any money you invest into it should be safe and secure whilst earning you interest. With other types of ISA such as the stocks and shares kind, there is a certain level of risk and so they act more in line with other investment types.
You should also make sure your provider is authorised and regulated by the Financial Conduct Authority (FCA). The Financial Conduct Authority is a financial regulatory service that ensures certain ethical standards in order to protect consumers. Most online platforms will also employ stringent data protection protocols in order to protect your personal information.
For the 2021/22 tax year, the allowance for paying into one cash ISA is £20,000. This one cash ISA allowance applies for a cash ISA, stocks & shares ISAs, a Lifetime ISA (This Lifetime ISA has a lower limit of just £4,000) or an innovative finance ISA. This allowance can also consist of a combination of the four different types as long as the total is within this annual ISA allowance.
After you reach your ISA allowance, you won’t be able to put any more money into any kind of ISA during the same tax year, and you must pay any money in before the 6th April 2022 to be within this allowance.
Personal Savings Allowance
The Personal savings allowance or the PSA was introduced in 2016 and allows any basic rate paying taxpayer to earn up to £1,000 of savings free from income tax (This rate is £500 for people on the higher tax rate). For most people, making full use of an ISA allowance makes perfect sense: any tax benefits you get from your ISA allowance allows you to keep your tax free benefits year on year.
Another thing to take note of when it comes to savings accounts and the personal savings allowance is the fact that whilst this allowance may be good for avoiding paying tax without an ISA account, if the savings rates rise, then tax may become an issue.
If the government were to make any major reviews to the way that savings are taxed at any point in the future, the PSA may be vulnerable to a change. ISAs are well established, and a big change in the tax-free allowance of these accounts would be extremely hard to justify in comparison to scrapping or lowering the Personal Savings Allowance.
Is it worth having an ISA?
Thanks to the introduction of the Personal Saving Allowance, the question has now arisen as to whether it is actually worth having an ISA. The Personal Savings Allowance means basic rate taxpayers will not have to pay tax on any interest earned up to the sum of £1,000 for basic-rate taxpayers. This means that if you fall under this amount, the only reason for you to choose an ISA over savings accounts is if the rates were better, and sadly this is rarely the case.
However, it is not as cut and dry as this, as if you start to earn interest above the Personal Savings Allowance in the future, your interest that had been earned would already be protected from tax should these funds already be safely tucked away in an ISA. It is also worth having an ISA if you were thinking of taking advantage of an investment ISA and would like to protect your investment income from any tax bill.
Always bear in mind that with a a more risky type of ISA – such as a stocks and shares ISA or innovative finance ISAS- your capital is always at risk as with any investment and you could get back less than your original investment.
You can transfer any ISA savings you have from one cash ISA provider to another at any point you like and as many times as you like. Make sure you read the terms of your current ISA and complete an ISA transfer form. You can also switch between types of ISA (such as an easy access cash ISAs to fixed rate cash ISAs or vice versa). This is great as it allows you to compare ISA accounts and ensure you always have the best cash ISA rates or even swap the type of account if your circumstances change.
What are alternatives to ISAs?
If you want tax free interest on your savings account but don’t like the sound of an ISA, there are other options you can go for, including:
Stocks and Share ISA
This type of ISA allows you to invest in shares whilst protecting your profit from income tax and capital gains tax. Since the ISA is based around the stock market, your money is at risk and if things go south you can even end up losing money! These types of ISAS are seen more as long term investments and if you opt for this type of ISA, you should prepare to invest for at least five years.
Savings accounts don’t usually offer an interest rate as high as a cash ISA but you can access your money much easier, being able to move it around freely.
Premium bonds are a monthly investment scheme and act almost as a raffle. Each £1 you invest gives you an entry with monthly prizes ranging from £1 all the way up to £1 million. You have to invest at least £25 to enter for 25 entries. You don’t earn any interest on these bonds – any money you get from the investment is purely by luck
ISA Frequently asked questions
Can I withdraw money from ISAS?
Yes, by law, you can withdraw from your ISA at any time. But keep in mind, many fixed rate cash ISAs have a penalty in place if you withdraw your funds before the fixed term is up!
Are ISAs safe?
Yes, they are – As long as the ISA is provided by a UK regulated bank or building society. With an ISA from one of these, the first £85,000 of money is protected by the Financial services compensation scheme. The FSCS and the Financial Conduct Authority help protect consumers and provide cover in case the provider goes under.
What is the total annual allowance for ISAs?
The total allowance for the 2021/22 tax year is £20,000.
Does my credit rating affect my eligibility?
Cash ISAs don’t qualify as a credit product, so they are not dependent on your credit score. They also have zero impact on your credit score whilst you have one.
How many ISAs can I have at once?
There’s no limit here! You can have as many cash ISAs as you want, but you can only open one per year.
Can I inherit an ISA?
Thanks to recent changes in policy, yes you can. If you’re a surviving spouse or surviving civil partner, there are special terms that allow you to continue to earn tax free interest on a deceased persons ISA. We go further into this in our page about inheriting ISAs.
What is a flexible ISA?
The flexible ISA was brought in during 2016. They are a type of ISA that allows any saver to withdraw funds and then replace those funds in the same tax year without it counting towards the ISA allowance for that year. Whilst these types of ISA were hard to find, they’re becoming more common. If this sounds like something you would be interested in, check that the ISA you want to open has it.