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ISA is short for Individual Savings Account and allows you to earn interest tax free, but you’re limited to how much you can put in each year.
ISAs, or individual savings accounts, can help you build up a pot of money that you’ll never pay tax on. Here’s a rundown of the different types of ISA available and how to find the best rates.
What is an ISA?
So, what is an ISA? ISAs allow you to save or invest a certain amount each year without paying tax on any interest or capital gains you earn.
Each tax year you have an annual allowance for how much you can put in an ISA. For the 2023/24 tax year, the ISA allowance is £20,000. The tax year runs from 6 April to 5 April the following year.
If you don’t use all your ISA allowance in the same tax year, it can’t be rolled over to the next year. You use it or lose it.
What type of ISA can I open?
There are many different types of ISA, so here’s a quick rundown of the ones you can choose from:
- Cash ISAs – the most standard type of ISA. They tend to be more flexible, allowing access to your money at any time, but tend to offer lower interest rates. Still, they usually offer better interest rates than standard current accounts, and the tax-free benefits make them worth considering.
- Fixed-rate ISAs – get a fixed-interest rate by agreeing to lock your money away for a fixed term. The longer the term, the better the interest rates tend to be.
- Junior ISAs – a great way to help save towards your child’s future. Once they turn 18, the money is theirs to spend how they like, this could be for university fees, their first car or even a house deposit.
- Stocks & Shares ISAs – instead of simply depositing cash, this type of ISA allows you to invest in various stocks, with the dividends and interest earned remaining tax free. These are riskier than other types of ISA, because they can decrease in value, depending on how your investments turn out.
- Lifetime ISAs (LISAs) – a spiritual successor to the Help to Buy ISA, LISAs are open for 18-40-year-olds who want to save towards either their first home or retirement.
- Help to Buy ISAs – a government scheme to help first-time buyers save towards their first home. These are no longer available to new applicants.
How do ISAs work?
There are four main types of ISA – cash ISAs, stocks and shares ISAs, innovative finance ISAs and Lifetime ISAs. You can save up to £20,000 in one type of account or split your allowance across some or all of the other types. But you’ll need to make sure you stick to all the rules so you don’t lose the tax advantages.
- The maximum amount you can add to a Lifetime ISA is £4,000 a year.
- Cash ISAs work in much the same way as regular savings accounts. Interest rates vary between providers and you can choose between instant access or fixed-rate ISAs. With a fixed-rate ISA, your money is tied up for a fixed term. You’re only allowed to open one cash ISA in each tax year.
- Stocks and shares ISAs allow you to invest in the stock market through funds, bonds and individual shares. You won’t have to pay tax on any profits or dividends. While investments are riskier than cash, shares typically outperform cash over the long term so they could give you better returns. Always remember, though, that the value of your investments can go down as well as up and that how they’ve done in the past isn’t a guarantee of how they’ll perform in the future. This all means that you could get back less than you paid in.
- Innovative finance ISAs enable you to earn tax-free interest through peer-to-peer lending. Essentially, you take on the role of a bank by lending to individuals, businesses or property developers through an online platform. It can give you higher returns than a cash ISA but it’s also riskier as there’s a chance the borrower could default on their loan, so you may get back less or even lose what you had invested.
- Lifetime ISAs are designed to help young people save up for either a deposit on their first home or for their retirement. You can open one if you’re 18 or over and under 40, and you can save up to £4,000 a year up to the age of 50. You’ll get a 25% bonus from the Government every year you make a deposit. However, you can only withdraw from a Lifetime ISA if you’re buying your first home, or if you’re over 60 years old, or are terminally ill with less than 12 months to live. Otherwise there will be a withdrawal charge.
Which is the best ISA for me?
This really depends on what you’re saving for and your attitude to risk. A cash ISA may be more appealing to a cautious saver who wouldn’t want to risk losing their money. Cash ISAs in the form of an instant access account may be an option if you’re saving for a short-term goal or need access to your cash in an emergency. The downside is that interest rates tend to be very low. Stocks and shares ISAs and innovative finance ISAs are riskier, but they could give you better returns than cash over the long term.
If you’re an adult under 40 and saving to buy your first home, a Lifetime ISA could be worth considering as you get a 25% bonus, up to a maximum of £1,000 a year – basically free money for saving. However, you’ll have to pay a penalty if you withdraw the money for something other than a property deposit or retirement.
How do I apply for an ISA?
Opening an ISA is pretty easy. Most ISA providers will let you open your account either in branch, online or over the phone. You’ll need to be at least 16 to open an account, and you can’t have exceeded your total ISA allowance for the year already.
To apply, you’ll just need to fill in some personal details like your name, address, job, National Insurance etc. along with some forms of ID. You won’t need to go through with a credit check though. ISAs aren’t credit products (they don’t have an overdraft) which means your credit score won’t be considered as part of your application.
To find the right ISA for you, you can compare ISAs using Compare the Market’s comparison service.
Frequently asked questions
Who can open an ISA?
Cash ISAs are open to any UK resident aged 16 or over. To hold a stocks and shares or innovative finance ISA, you must be at least 18. Lifetime ISAs are open to adults aged 18-39 inclusive. With a junior ISA, a parent can open the account on behalf of their child, who’s under 18, with the child taking control of the ISA when they turn 16.
How many ISAs can I have?
ISA allowance rules mean you can have as many ISAs as you like. There’s no legal limit. However, you’re only allowed to pay into one of each type of ISA a year, which could make having multiple ISAs less useful to you. If you already have multiple ISAs of the same type, you might want to consider combining them into one, easier to manage, account. On the other hand, if your savings total more than £85,000, you might be better off splitting them between several ISAs. This is because your ISA is protected by the Financial Services Compensation Scheme (FSCS), but only up to a limit of £85,000. This means, if your ISA provider went bust, anything more than £85,000 would be lost. So, if you split your savings of more than £85,000 between different ISA providers, you can better protect your savings.
How do I switch ISAs?
If you’re not happy with your current ISA rate, you can switch providers. Never take out the money yourself as you’ll lose your tax benefits. Your new provider should be able to take care of the switch for you. A cash transfer should take no longer than 15 working days. If you transfer a stocks and shares ISA, it should take no more than 30 calendar days.
Can I get an ISA for my children?
Yes. You can open a Junior ISA on behalf of your child. Money deposited in the account belongs to the child, but they can’t withdraw it until they turn 18. Junior ISAs have a lower annual limit than adult ISAs at £9,000 for the 2023/24 tax year, but you can usually get better interest rates.
How do I find the best ISA rates?
If you think you’re unlikely to need access to your savings in the short term, consider a fixed-rate ISA. These usually offer better interest rates than instant-access ISAs. The longer you’re willing to put your money away for, the better rate you’re likely to get.
Which is best – an ISA or savings account?
You no longer need to save into an ISA to earn tax-free interest, so the benefits aren’t as great as they once were. Thanks to the introduction of the personal savings allowance, basic rate taxpayers can now earn up to £1,000 interest a year without having to pay tax on it. For most people that means all their savings will be tax-free. So, when comparing the best cash ISA rates, it’s also worth comparing savings accounts to see if they would offer you a higher return. Where ISAs can be particularly beneficial over time is if you open a Lifetime ISA or stocks and shares ISA.
How can I withdraw money from an ISA?
How you withdraw your money from an ISA will depend on what type of ISA you have. This is because there are different rules on withdrawal and how they impact any benefits you’re receiving. Here’s a breakdown of how to withdraw from each of the main types of ISA:
- Instant-access cash ISAs – as the name suggests, you can withdraw from an instant access or flexible ISA whenever you like.
- Fixed-rate ISAs – when opening the account, you’ll agree to lock your money away for a fixed term. If you want to withdraw your money before this term ends, you’ll likely face a fee and lose your tax benefits.
- Junior ISAs – the child will be able to take control of the account at the age of 16, but won’t be able to withdraw money until they’re 18.
- Stocks & Shares ISAs – you can withdraw your money at any time. However, if you decide to reinvest this money into the account, it will count towards your annual ISA allowance.
- Lifetime ISAs (LISAs) – the money in a LISA can be accessed either when buying your first home or retiring. If retiring, you can withdraw some or all of the money when you turn 60. If you’re using the money to buy your first home, you’ll need to tell your LISA provider to transfer the money to your solicitor handling the purchase. If you don’t do this, you’ll be charged a 25% withdrawal penalty fee.
- Help to Buy ISAs – when you’re ready to buy your first home, you’ll need to apply for your Help to Buy bonus through your solicitor. Don’t just withdraw the money, as you’ll lose your government and tax-free bonuses.
What is a cash ISA?
Cash ISAs are a type of tax-free savings account, just like many of the other types of ISA. A cash ISA is one of the most simple and popular types of ISA, because it’s an easy way to save with that great tax-free benefit. You can save up to £20,000 a year, as part of your ISA allowance.
There are many different types of cash ISA though, with options for flexibility, easy access, long-term savings and even kids. There’s bound to be an ISA to suit your needs, and we can help you find one.
What is a flexible ISA?
A flexible ISA is probably the simplest type of ISA, because there are fewer rules about when you can access your money. A flexible ISA allows you to withdraw your money at any time, meaning they offer the greatest accessibility and flexibility for saving: hence the name. However, because of this, flexible ISAs tend to offer lower interest rates than their fixed-rate or notice ISA cousins. This is because ISA providers use your money to make investments, which means allowing you to access the money whenever you like could disrupt their plans. That’s why ISA providers reward other, less flexible, accounts with better interest rates.
Can I hold different currencies in an ISA?
No, according to the HMRC, you can only deposit and save Great British Pounds (GBP) into an ISA. If you’re looking to make a foreign currency deposit into an ISA, a currency conversion will need to be made at the same time.
What do I need to compare ISAs?
At Compare the Market, we currently only compare cash and Lifetime ISAs. You don’t need anything to compare ISA rates, but you will need some basic personal details if you decide to apply, including:
- your National Insurance number
- your address
- your occupation
- details of any current ISA you want to switch into the new ISA
What our expert says...
“While ISAs might have lost some of their appeal thanks to the introduction of the personal savings allowance, they still offer a simple way to save tax-free. And they’re flexible as you can start with just £1 and transfer them as many times as you like to get the best rate.”
- Alex Hasty, Finances expert
Why use Compare the Market?
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The content written in this article is for information purposes only and should not be taken as financial advice. If you require support on the products discussed here, please speak to your bank/lender or seek the advice of an independent professional financial advisor. We also have more information on our Customer Support Hub.