ISAs explained

What’s an ISA?

An ISA (which stands for Individual Savings Account) is a tax-free account for cash or investments. There are several different types of ISA – including cash, Lifetime, stocks and shares, Innovative Finance and Junior ISAs – that all have different features and payment limits.

What are the benefits of an ISA?

One of the main ISA benefits is that your interest on savings or returns on investments up to the annual ISA allowance of £20,000 will generally be tax-free, depending on personal circumstances.

However if it’s a cash ISA you’re considering, 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 if you’re using a non-ISA savings account 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. But after this, you'll pay tax at 20% or 40% respectively. If you’re an additional rate tax payer you will pay tax on all interest earned by a non-ISA savings account.

With this in mind it's worth considering other types of savings accounts before putting your money away. Pay attention to the interest rates on offer, as you might find you’re better off with a regular savings 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.

Thinking of investing? The way investments are taxed can vary depending on what types of returns they offer and these might be covered by other tax allowances, but returns from investments in a stocks and shares ISA are tax-free.

Why might you open an ISA?

• You don’t want to pay tax on the returns you get from saving or investing - A lot of people won't go over their personal savings allowance, and therefore won't have to pay any tax. But it's best to check, especially if you have a large amount of savings or a high interest rate savings account.

• 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, or protect all your investment returns from tax.

• You want to save for a home or retirement - The government will boost your savings with a Lifetime ISA.

What’s the ISA allowance?

There's a cap on how much you can pay into your ISAs each year, which is called the ISA allowance. For the 2024/2025 tax year, the ISA allowance for adults is £20,000. You can have multiple ISAs (cash, stocks and shares, Lifetime and innovative financial ISAs) but you mustn't deposit more than £20,000 in total into your ISAs in each tax year.

For Lifetime ISAs, the allowance is £4,000 which counts towards your £20,000 annual allowance.

For under 18s the Junior ISA allowance is £9,000 for each child.

The ISA allowance has been the same since 2018, but the government can decide to adjust it if they want to. If the ISA allowance changes, the government will announce it and you’ll be given notice by your ISA provider.

When does the ISA allowance reset?

The ISA allowance runs from 6th April to 5th April the following year. This is called the tax year or financial year.

Can you carry over your unused ISA allowance?

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 April 5th counts toward the new tax year's allowance, so leave plenty of time for transfers and payments.

What happens if you go over your ISA allowance?

If you go over your ISA allowance during the tax year, contact your ISA provider to ask them to remove the excess payment, including any interest earned.

If the overpayment was in a previous tax year, HMRC will write to you to let you know what to do.

You won’t get tax relief on anything paid in over the £20,000 ISA allowance.

What if I withdraw money from my ISA?

There are two types of ISA: flexible and non-flexible. If your ISA is non-flexible, if you pay money into your ISA but withdraw it in the same year, it still counts towards your ISA allowance.

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 will stay at £15,000 and won't go back up to £20,000. If you put the £5,000 back in it will count again as a new payment.

If your ISA is flexible it lets you withdraw and replace money in the same tax year without affecting your allowance, so long as it’s re-deposited with the same provider.

Cash ISAs and stocks and shares ISAs can both be flexible, but not all providers offer them. If you think you’ll want to remove and add money, and this might take you over the £20,000 ISA allowance, this could be an important feature for you, so keep your eyes peeled for this feature.

It's really important that if you want to switch or transfer money between ISAs, you don’t withdraw the money and move it yourself. Your ISA provider can transfer the money to a new ISA provider for you, which means your allowance is protected.

Can I have more than one ISA?

Yes, the government allows you to pay into four different types of ISA each year:

• Cash ISA

• Stocks and shares ISA

• Lifetime ISA

• Innovative finance ISA

You can open more than one cash ISA, stocks and shares ISA and Innovative Finance ISA each year.

You don’t need to close down old ISAs. You can open a new ISA each year if you want to, and your existing ones can simply sit there and earn interest. However it can be a good idea to close old ones and consolidate your money to protect against fraud.

Just remember, your ISA allowance is in total, rather than by account, so even if you have 3 ISAs you can only pay a total of £20,000 into them over the tax year.

You can only pay into two Junior ISA per child and one Lifetime ISA within the tax year.

Is my money safe in an ISA?

Unfortunately there’s not one straight answer to this.

If you take out an ISA with a UK provider, the money you deposit may be protected. But the protection you get (if any) varies by provider and how your money is saved or invested.

Whether your money is eligible for protection will change depending on things such as:

• Who the provider is

• How much you’re saving or investing

• If investing, what kind of investment it is

• How and where the provider holds your money or investments

Before choosing an ISA provider, always check what they provide in terms of protection and make sure you’re comfortable with it.

The most likely type of protection you’d expect to benefit from in the UK is from the Financial Services Compensation Scheme (FSCS).

The FSCS protects eligible deposits and some investments up to a value of £85,000 for banks, building societies and credit unions, savings providers and investment firms that are authorised by the Prudential Regulation Authority or the Financial Conduct Authority.

The £85,000 limit is per person, per bank or authorised firm, and the £85,000 limit on compensation for deposits and investments are separate.

If you’re considering a stocks & shares ISA it’s important to note protection does not cover losses incurred due to investment performance, and some investment types are not covered at all.

For more information on FSCS protection visit their website.

This isn't financial advice or personalised to you, and we're not recommending or suggesting you take any particular action. If you're in any doubt about what's right for you, then speak to an authorised financial advisor.

Tax treatment depends on individual circumstances and may change in the future.

The value of your investment can go up and down and you could get back less than you put in.

Interested in opening an ISA? At Monzo we offer cash ISAs and stocks and shares ISAs. Find out more about saving and investing with Monzo.