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What is an ISA?

ISAs offer you a flexible way to save or invest without paying any tax on the interest or profits you earn. Our simple guide explains the basics of how they work, what types of ISA are available and how ISAs compare with regular savings accounts.

ISAs offer you a flexible way to save or invest without paying any tax on the interest or profits you earn. Our simple guide explains the basics of how they work, what types of ISA are available and how ISAs compare with regular savings accounts.

Written by
Sajni Shah
Consumer expert on money and utilities
Last Updated
23 FEBRUARY 2023
9 min read
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What is an ISA?

ISA stands for individual savings account. Put simply, it’s a savings or investment account that you never pay tax on.

There are limits set by the government on how much you can save or invest into an ISA account in the UK each year. This is called your ISA allowance. The exact amount can change each tax year.

ISAs are offered by a range of financial institutions, including banks, building societies, the Post Office, insurance providers, stockbrokers and peer-to-peer lenders.

How do ISAs work?

Your money can’t be taxed when it’s in an ISA, no matter how long you keep it in there.

You’ll get a new ISA allowance at the start of every tax year. This is how much you can pay into an ISA. For the tax years 2023/24 and 2024/25, the maximum amount you can put in is £20,000. The tax year runs from 6 April to 5 April.

If you don’t use all your ISA allowance before the end of the tax year, you’ll lose it forever. You can’t roll it over to the next year.

To open an ISA, you’ll need to be at least 16 years old and a UK resident. In April 2024, the minimum age increases to 18. You can set up an ISA account online, in a branch, by post or over the phone, depending on which product you choose.

You can have more than one ISA, but the allowance applies across the total of all accounts. You can put the full £20,000 into just one account or split it across various types of ISA.

In the past, you weren’t able to pay into two ISAs of the same type in the same tax year, but this is changing from 6 April 2024. From that date, you’ll be able to take out multiple ISAs of the same type, with the exception of a Lifetime ISA. However, you’ll still need to stick to the same overall limit of £20,000.

Who can open an ISA?

To open an ISA, you must be a resident of the UK with a permanent residential address and be:

  • 16 or over for a cash ISA. This changes to 18 from 6 April 2024
  • 18 or over for a stocks and shares or Innovative Finance ISA
  • Between 18 and 40 for a Lifetime ISA 
  • Under 18 for a Junior ISA.

Only individuals can open an ISA. You can’t hold a joint ISA with someone else – even your spouse or civil partner – or on their behalf.

How do you open an ISA?

Opening an ISA is a simple process. As it’s not a credit product, there’s no credit check to worry about. You won’t have access to an overdraft or be able to borrow against it, so opening an ISA won’t affect your credit score.

Most providers let you open an ISA in person at a local branch, over the phone, by post or online. Some ISAs can only be managed in a particular way, for example entirely online or only in a branch – choose what’s convenient for you.

All you’ll need is proof of ID, including your address, and National Insurance number. You’ll also need a valid email address if you’re opening an ISA online.

In some cases, you can open a cash ISA with as little as £1, although some will require a minimum deposit of £100 or even £1,000.

What types of ISA are there?

There are several types of ISA:

  • Cash ISA – works much like a regular savings account except the interest you earn isn’t taxed. 
  • Lifetime ISA – designed to help young people under 40 save for the future and benefit from a 25% government bonus of up to £1,000 a year.
  • Stocks and shares ISA – lets you invest your allowance in shares and bonds. As with any investment, your money is at risk with a stocks and shares ISA.
  • Innovative Finance ISA (IFISA) – peer-to-peer lending that allows you to invest your money to lend to borrowers or businesses.
  • Junior ISA – save tax-free on behalf of your child until they turn 18.

Some types of ISA are riskier than others but may have potential for higher profits – and losses too.

Did you know?

11.8 million adult ISA accounts totalling around £66.9 billion were subscribed to in 2021 to 2022, according to government figures. Of these, around 47% of savers saved between £1 and £2,499 while 15% saved the maximum amount of £20,000.
Source: GOV.UK

What is a cash ISA?

A cash ISA is like a regular savings account, except that the interest earned is never taxed. Interest rates vary among providers. The minimum amount you’ll need to deposit to open your account can vary from £1 up to £1,000.

You can choose between:

  • An instant-access cash ISA – you can pay in and take out money as often as you like, although some ISA accounts do have limits on this. The interest rate is usually variable, which means it can go up or down.
  • A fixed-rate cash ISA – you deposit money and agree to lock it away for a fixed length of time. Generally, the longer you tie up your money, the higher the rate of interest you’ll earn. There are usually penalties if you try to access your money before the end of the fixed-rate period. With some accounts, you may also have a set number of days from opening your account to deposit the cash.

From 6 April 2024, you’ll need to be aged 18 or over to open a cash ISA savings account.

You can transfer an existing cash ISA to a new provider at any time without losing your tax-free benefits. From 6 April 2024, you’ll also be able to make partial transfers of current year ISA subscriptions between ISA managers. Previously you had to transfer the whole amount.

To keep the tax-free status of your money, you’ll need to contact your new provider and arrange a transfer, rather than withdrawing the money and opening a new account.

What is a Lifetime ISA?

A Lifetime ISA (LISA) is available to anyone aged 18 to 39. You can use it to buy your first home – the property must cost £450,000 or less – or save for your retirement.

You can save up to £4,000 a year until the age of 50. You must make your first payment into your ISA before you’re 40.

You’ll receive a 25% bonus from the government on top of what you pay in. Potentially, that could give you an extra £1,000 a year. The £4,000 counts towards your annual ISA limit, so you can still put £16,000 in another ISA too.

There’s a penalty to pay, though, if you withdraw the money before your 60th birthday or you don’t use it to buy a house, unless you’re terminally ill with less than 12 months to live.

Did you know?

The government’s Help to Buy ISA closed on 30 November 2019 and new applicants can no longer apply. Much like the Lifetime ISA, it was designed to help first-time buyers save for a house deposit. If you opened a Help to Buy ISA before the cut-off date, you can continue saving into your account until November 2029.

What other types of ISA are there?

You can only compare cash ISAs with Compare the Market, but there are other types of ISA available:

Stocks and shares ISAs 
Stocks and shares ISAs give anyone over the age of 18 the chance to invest in the stock market through funds, bonds and individual shares. You’ll usually need to invest a minimum of at least a £100 lump sum or £25 a month, but this can vary considerably among providers. You won’t pay tax on any profits or dividends you receive.

Your money is more at risk than with a cash ISA, but you could get better returns. These types of ISAs are usually most suitable for people who are willing to invest for at least five years, as the value of the investment will go up and down and you could get back less than you put in.

Innovative Finance ISAs 
Innovative Finance ISAs (IFISAs) allow you to earn tax-free interest through peer-to-peer lending, where you act as the lender. They can be more lucrative than cash ISAs, but they’re also riskier as there’s a chance the borrower might not pay back the loan. You need to be over 18 to get this type of ISA.

Junior ISAs 
Junior ISAs are for children under the age of 18. Parents or guardians with parental responsibility can open the account to save or invest up to £9,000 in each tax year on behalf of their child. The child can’t access their ISA until their 18th birthday.

Previously it was possible for a 16- or 17-year-old to have both a Junior ISA and a cash ISA, but after 6 April 2024 they can have only a Junior ISA.

What do I need to know before opening an ISA?

There’s a few things to consider before deciding which ISA is right for you:

  • Access – if you want an emergency pot that you can dip into at any time, an easy-access cash ISA might work well. Just be aware that some providers limit the amount of withdrawals you can make, so read the terms and conditions before you commit. If you’re happy to lock your money away for a while, fixed-term ISAs usually offer a higher interest rate. Just be aware that you could be penalised if you try to get your money out before the term is up.
  • Flexibility – some ISAs let you take out your cash and top your ISA back up again in the same tax year, without it affecting your ISA allowance. The current allowance is £20,000. Let’s say you put £10,000 in your ISA during the 2023/24 tax year. You then take £5,000 out. If your ISA is ‘flexible’, you can still deposit up to £15,000 during the same tax year rather than just £10,000 (your remaining allowance if your ISA isn’t flexible). If you think you might want this option, check which ISAs are ‘flexible’ when comparing deals.
  • Fixed or variable interest – variable ISAs have an interest rate that can go up or down. This is often the case with easy-access accounts. Your provider should tell you in advance if your interest rate will be cut. If you want the certainty of knowing your interest rate won’t change, a fixed-rate ISA might be a better option.
  • When and how is interest paid? – some ISAs pay interest monthly, while others pay annually. Some providers may insist the interest is paid into another account, while others want you to pay the interest back into the ISA to help it grow. And there are some that give you the choice.
  • Transfers – if you want to transfer ISAs from previous years, check to see if this is possible. Not all cash ISAs will accept transfers.
  • Security –  your money in a bank or building society will be protected up to £85,000 by the Financial Services Compensation Scheme (FSCS). If you’re close to this limit with any provider, you may want to spread your cash around with another bank or building society that’s not registered under the same banking licence.

It’s important to read the terms and conditions so you know how your ISA works before signing up.

How many ISAs can I have?

In the past, you’ve only been able to open one ISA of the same type each tax year. This changes on 6 April 2024. From then, you can put money in multiple ISAs of any type, other than a Lifetime ISA, in any one tax year.

Your ISAs can be a mixture of cash ISAs, IFISAs, stocks and shares ISAs and Lifetime ISAs (but only one of these). The maximum you can put in is the total ISA limit for that tax year – currently £20,000.

Did you know?

If you’d saved the full ISA allowance every year from when they were introduced, including the 2023/24 allowance, you could now have a tax-free lump sum of £241,520 plus interest.

Can I withdraw money from my ISA and put it back later?

If you have a flexible ISA, you can take out money then put it back in your ISA without affecting your yearly allowance. The only condition is that you must replace the amount you took out before the end of the same tax year. If you want this option, be sure to look for flexible ISAs when comparing deals.

Can I transfer my ISA?

You can transfer your ISA to another provider at any time. From 6 April 2024, you’ll be able to make partial transfers of current year ISA subscriptions between ISA providers. Previously, you had to transfer all of the current year’s subscription.

You can transfer your savings to a different type of ISA or to the same type of ISA. Before you transfer, find out if there are any restrictions or charges. Some cash ISA providers won’t accept transfers from stocks and shares ISAs, for example. And if you want to transfer money from a Lifetime ISA into a different ISA before you reach the age of 60, you’ll have to pay a 25% withdrawal fee.

To switch providers, you’ll need to contact your new provider and fill out an ISA transfer form. Don’t just withdraw your money without filling in the form. If you do, you’ll lose the tax-free status on your money.

What happens to my ISA if I die?

If you die, your ISA will lose its tax-free status. If you leave more than £325,000 in assets, your ISA will be subject to inheritance tax along with the rest of your estate.

The only exception is if it’s inherited by your spouse or civil partner. In this case, there’ll be no inheritance tax to pay and your spouse or civil partner can move the ISA into their name. This is called additional permitted subscription. As well as the balance of your ISA, they’ll also inherit your ISA allowance on top of their own £20,000 allowance.

What is the difference between an ISA and a savings account?

There are several differences:

  • Tax – with a savings account, you may have to pay income tax on the interest you earn. However, you do get a personal savings allowance. This means that basic rate taxpayers (20%) can earn up to £1,000 in interest a year before they have to pay tax, while higher taxpayers (40%) can earn up to £500. An ISA is totally tax-free, no matter how much interest you earn.
  • Savings limits – unless there’s a limit set by your bank or building society, you can put as much money as you like into a savings account. With an ISA, you can only deposit up to the allowance for each tax year. The current ISA allowance is £20,000.
  • Account holders – an ISA is an ‘individual’ savings account, so it can only be opened in one person’s name. You can open a joint savings account with another person, such as your partner or spouse.
  • Government help – if you’re a first-time buyer under 40, a Lifetime ISA could be a better option than a savings account, as you get a 25% bonus from the government. This could be a real bonus if you’re trying to save for a mortgage deposit.

Frequently asked questions

How much tax can I save with ISAs?

You won’t have to pay income tax or capital gains tax on an ISA, which means it’s one of the most tax-efficient ways to save. The amount you’ll actually save in tax depends on your individual circumstances and how much you have in your ISA accounts.

What happens if I go over my ISA allowance?

If you think you’ve gone over your ISA allowance limit, contact the HMRC savings helpline. They’ll tell you what to do next. If it’s a genuine mistake and the first time it’s happened, you may be let off with a warning letter.

But if HMRC decides to take action, any savings and related interest earned above your allowance could be taxed.

HMRC will see you’ve paid in too much money from your records at the end of the tax year, so it’s best to tell them as soon as you realise your mistake.

Can I carry any unused allowance over to the next tax year?

No. Any unused allowance can’t be carried over to the next tax year. The ISA allowance will be reset back to the yearly limit again on 6 April – the beginning of the new tax year.

How are ISAs protected?

Just like all UK-authorised bank accounts, ISAs are protected under the Financial Services Compensation Scheme (FSCS). Savings up to £85,000 per person, per bank, are protected if the bank goes bust. If this happens, you’ll be automatically compensated by the FSCS.

How can I check how much of my ISA allowance I’ve used?

Contact your ISA provider to find out how much of your ISA allowance you’ve used. You can also find out by logging on to your online account, if you have one.

Will an ISA affect my benefits?

An ISA could affect you if you’re on means-tested benefits, such as Universal Credit, Housing Benefit or Income Support. Tell the benefits office about your savings as it could affect how much you receive.

If you have more than £16,000 in savings, you’ll no longer be eligible for means-tested benefits.

If you have £10,000 or less in savings and investments, this won’t affect your Pension Credit.

What happens to my ISA if I move abroad?

If you’re moving abroad, you won’t be able to make a deposit into your ISA after the tax year you move. The only exception is if you’re a Crown employee who works abroad or the spouse or civil partner of one. You must tell your ISA provider as soon as you’re no longer a UK resident.

You’re allowed to keep your ISA open and still benefit from the UK tax relief on any interest or investments earned through the account. If you return to the UK, you can start making deposits again.

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Sajni Shah - Consumer expert on utilities and money

Sajni is passionate about building products, allowing Compare the Market to help you make great financial decisions. She keeps track of the latest trends and evolving markets to find new ways to help you save money.

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