14 Nov 2018

The big guide to ISAs

An ISA is a tax-free account for cash and investments. Learn how they work and what the different types are – including cash, Help to Buy, Lifetime, and stock and shares ISAs.

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What is an ISA?
Why use an ISA?
Can I have more than one ISA?
How does the ISA allowance work?
Withdrawing money – how does it affect my allowance?
Types of ISA – comparison table
Cash ISA
Easy access ISA
Regular saver ISA
Fixed-rate ISA
Help to Buy ISA
Lifetime ISA
Innovative finance ISA
Stocks and shares ISA

Illustration of a book

What is an ISA?

An ISA is a type of savings account. You can earn interest, dividends and capital gains from an ISA without ever being taxed.

The amount you’re allowed to pay into an ISA is limited by the UK government – the current allowance is £20,000 per year.

Why use an ISA?

One of the main attractions of an ISA is that you’ll never be taxed on interest.

But this isn’t the advantage it used to be, as the government introduced a personal savings allowance on all savings accounts in 2016. This means that – no matter what savings account you use – you won’t be taxed on the first £1,000 of interest if you’re a basic rate taxpayer, or the first £500 if you’re a higher rate taxpayer. After this, you’ll pay tax at 20% or 40% respectively.

With this in mind – and the fact that many ISAs have low interest rates – it’s worth considering other types of savings accounts before putting your money away.

But an ISA can still come in handy, for example if:

You want to save for a home or retirement

The government will boost your savings by up to 25% when you save with a Help to Buy ISA or Lifetime ISA. We explain how these work in more detail below.

You’re an additional rate taxpayer

You won’t have a personal savings allowance if you pay income tax at 45%. In this case, an ISA is the only type of savings account where you can earn tax-free interest.

You expect to earn interest over your personal savings allowance

A lot of people won’t go over their allowance. But it’s best to check, especially if you have a large amount of money or a high interest rate savings account.

Bear in mind that many ISAs have a low interest rate, so you may be better off with a high-interest account even if you have to pay tax. Just remember, it’s your responsibility to tell HMRC if you go over your personal savings allowance.

Can I have more than one ISA?

Yes – the government allows you to have as many as four different types of ISAs each year:

  • Cash ISA
  • Lifetime ISA
  • Innovative finance ISA
  • Stocks and shares ISA

Interestingly, some providers have found a loophole to this rule and will let you open multiple cash ISAs with them. Also, the rule only applies to ISAs you’re currently paying into – you can open a new ISA of the same type each year with a different provider (unless it’s a Help to Buy ISA). The old one can simply sit there and earn interest.

Remember, it’s sensible to save no more than £85,000 with the same provider. Anything over this won’t be protected by the Financial Services Compensation Scheme.

How does the ISA allowance work?

Your ISA allowance is reset at the start of each tax year (on 6 April). The government may decide to adjust it or keep it the same.

For example, here’s how the ISA allowance has changed over the past five years:

  • 2014/15 – £15,000
  • 2015/16 – £15,240
  • 2016/17 – £15,240
  • 2017/18 – £20,000
  • 2018/19 – £20,000

Your ISA allowance works on a ‘use it or lose it’ basis, meaning you can’t roll unused allowance over to the next year. Any money arriving in your ISA after 5 April counts toward the new tax year’s allowance, so leave plenty of time for transfers and payments.

What if I have more than one ISA?

You don’t get a seperate allowance for each ISA – the allowance is per person, not per account. But it’s your choice how to split the allowance across different ISAs.

For example, you might pay £15,000 into a cash ISA and £5,000 into an innovative finance ISA. (Note that Help to Buy and Lifetime ISAs have their own annual limits, which we look at in more detail below.)

What if I withdraw money from my ISA?

Some ISAs let you withdraw money. But this doesn’t change your current ISA allowance. So, if you pay money into your ISA and withdraw it in the same year, your ISA allowance will go down but you’ll have nothing to show for it.

Here’s an example: say you put £5,000 into an ISA. This eats into your £20,000 allowance for the current tax year, meaning your remaining allowance is £15,000. But if you take the £5,000 out again, your allowance won’t go back up to £20,000.

Note that flexible ISAs are an exception to this rule – these accounts let you withdraw and replace money in the same tax year without wasting your allowance.

It’s also useful to know you can switch or transfer between ISAs without withdrawing the money yourself, so that your allowance is protected.

Types of ISA

Here’s a side-by-side comparison to help you get your head around the different types of ISA. Just remember, this information is only a guide – you should always research accounts yourself before applying for one.

  Type Age limit Common features Typical risk level Typical payment limit
Cash ISA Easy access ISA 16+ Withdraw money easily

Lower rates
Low Annual ISA allowance
  Regular saver ISA 16+ Monthly payments

Higher rates
Low Annual ISA allowance
  Fixed rate ISA 16+ Money is ‘locked’ away

Higher rates
Low Annual ISA allowance
  Help to Buy ISA 16+ Save for your first home

25% bonus from government
Low £200 per month (£2,400 per year)
Lifetime ISA   18+ Save for your first home or retirement

25% bonus from government
Low (cash) Medium/high (stocks and shares) £4,000 per year
Innovative finance ISA   18+ Lend to people and/or organisations

Higher rates
Medium Annual ISA allowance
Stocks and shares ISA   18+ Investments in funds, bonds and shares

Potentially high rewards
Medium/high Annual ISA allowance

We’ve explored each of these types of ISA in more detail below.

Cash ISA

Cash ISAs are relatively straightforward compared to the other types of ISA. There are four main subtypes:

Easy access ISA

All cash ISAs must let you access your money whenever you want, but many providers charge a hefty fee. Easy access ISAs are generally designed to let you withdraw your savings without being penalised.

You’ll usually get a cash card for the account, or have it linked to an existing card with the same provider. Just remember, paying money in and taking it out again will waste your ISA allowance (unless the account is flexible).

Regular saver ISA

A regular savers ISA may offer higher interest rates. You’ll need to pay in a certain amount every month – how much and for how long depends on your agreement with the bank. Your rate may go down if you miss a payment or take out money.

Fixed-rate ISA

Fixed-rate ISAs are designed to lock your money away for a set period (often a year or more). As mentioned above, providers can’t legally stop you from accessing your money – but there are usually harsher penalties for withdrawing from a fixed-rate ISA.

The advantage to fixed-rate ISAs is that they tend to offer higher interest rates. So, you may find them quite rewarding if you can commit to leaving your savings alone for a while.

Help to Buy ISA

The Help to Buy ISA is pretty different to other cash ISAs. It’s part of the government’s Help to Buy Scheme, which is designed to help people buy their first home.

When you first open your account, you can pay in a lump sum of up to £1,200. After that, you can save up to £200 a month. Once your savings reach £1,600, the government will top them up by 25%. For example, you’ll get £50 for every £200 you save.

The maximum bonus you can get from a Help to Buy ISA is £3,000. To get this you’d need to save £12,000, meaning your total savings would be £15,000. Assuming you pay the full £1,200 deposit and £200 every month afterwards, you can reach the maximum bonus in four and a half years.

You can only have one Help to Buy ISA per person. But you can pool your savings and bonus with someone else if you’re buying a house together. You’ll both need to be:

  • A first-time buyer
  • Aged 16 or over
  • Buying property in the UK up to £250,000 (or up to £450,000 in London)

One criticism of the Help to Buy ISA is that you can only access the 25% bonus after you’ve made the exchange on a house – even though your deposit usually gets paids before. But your solicitor may be able to negotiate an agreement with the seller. For example, they may let you pay a percentage of the deposit after the exchange.

Lifetime ISA

A Lifetime ISA – also called a ‘LISA’ – is designed to help you save for your first home or retirement (or both if you like). Much like the Help to Buy ISA, the Lifetime ISA is another government scheme that tops up your savings by 25%. But the LISA has a couple of advantages. For example, you can pay in up to £4,000 per year – £1,600 more than the Help to Buy ISA. There’s no monthly limit, so you can deposit it all in one go if you like.

You can also earn more in government bonuses with the Lifetime ISA. Each year your savings can be topped up by £1,000 (£400 more than the Help to Buy ISA) and you can keep earning the 25% bonus until you’re 50.

A Lifetime ISA also allows you to buy more expensive property outside London. You can use your bonus to purchase a home up to £450,000 anywhere in the UK. What’s more, you should have no issues using your LISA savings to pay the deposit before exchanging on a house.

As with the Help to Buy ISA, you can pool your Lifetime ISA savings and bonus with someone else’s if you’re buying a home with them. You must both:

  • Be between 18 and 40 years old to open a LISA
  • Wait at least 12 months after opening the account to buy a house with the bonus
  • Wait until you’re 60 to withdraw money for retirement (unless you’re diagnosed with a terminal illness)

One potential risk of getting a Lifetime ISA is you’ll pay a 25% charge if you withdraw money for an unapproved purpose (i.e. something that isn’t buying your first home or taking money for retirement). This means you’ll actually lose money.

Here’s an example: say you save £4,000 in your LISA and the government tops it up by £1,000. This gives you a total of £5,000. If you withdraw this money early and have to pay the charge, you’ll lose £1,250. This leaves you with £3,750 – which is £250 less than what you put in. So, it’s sensible to only get a Lifetime ISA if you can commit to its criteria.

Here are a few more things to consider before getting a Lifetime ISA:

  • Lifetime ISAs aren’t designed to be a replacement for pensions
  • You can hold cash or stocks and shares in a Lifetime ISA, or even a combination – just remember that stock and shares ISAs involve more risk
  • You can have both a Help to Buy ISA and a Lifetime ISA, but you can’t use bonuses from both to buy a home

Innovative finance ISAs

When you save with an innovative finance ISA, your money will be lent to other people or organizations. This type of ISA is often thought of as a halfway house between cash ISAs and stocks and shares ISAs. You may have the potential to earn more, but there is a chance that the borrowers won’t repay your money. Your cash will be spread across multiple loans to reduce risk.

Stocks & shares ISAs

When you put money in a stocks and shares ISA, you’re investing it. This means there’s a higher risk of losing your money than with a cash ISA, but there may also be the potential for higher rewards. You’ll usually invest in one or more of the following:

  • Shares – essentially, a portion of a company
  • Bonds – a kind of loan given to a company or government
  • Funds – shares or bonds from a variety of companies

Bonds usually pay interest, which counts towards your personal savings allowance. But interest on bonds is always tax-free if you earn it through an ISA.

With shares, there are generally two ways to make money: by selling them and through dividends.

Dividends are a portion of the company’s profits that it splits among its shareholders (i.e. the people who own its shares).

There’s a separate allowance for this, called a dividends allowance. Currently, the first £2,000 you make is tax-free. After that, you’ll be taxed at 7.5%, 32.5% or 38.1% depending if you’re a basic, higher or additional rate taxpayer. But once again, this doesn’t apply to stocks and shares ISAs – any dividends gained through one of these are tax-free.

If you sell your shares, the money you make is called ‘gains’. You normally have to pay capital gains tax on gains over £11,700 per year. But – you guessed it – you don’t pay capital gains tax on gains made through an ISA.

Stocks and shares ISAs are normally managed by a third party, such as an online service or fund management group. They may charge you a fee to open and use a stocks and shares ISA, including for things like withdrawing your money or changing your investments.


We hope this guide has answered your questions about ISAs and how they work. Feel free to comment below with more questions or suggestions! Next, you might like to learn about interest or savings accounts.

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