An ISA, or Individual Savings Account, is a tax-free way to save and invest money. The government introduced ISAs in 1999 to encourage people to save for their future. Since then, over £600 billion has been saved into ISAs.
There are several types of ISAs, the two most popular ones being cash ISAs and stocks and shares ISAs. You can save into one or both types of ISA in any tax year, but the total amount you can contribute across all your ISAs in that tax year is capped at £20,000.
You can have more than one ISA account simultaneously, but the total amount you contribute each tax year cannot exceed £20,000. So, for example, if you have already saved £10,000 into a cash ISA this tax year, you could only hold a further £10,000 into another ISA.
Cash ISAs are the simplest type of ISA. You open a Cash ISA with a bank, building society, or credit union and then just put your money in and leave it there until you need it. The interest you earn is paid tax-free.
With stocks and shares ISAs, you can invest your money in a wide range of investments, including shares, corporate bonds, government bonds, investment funds, and exchange-traded funds (ETFs).
The main reward of a stocks and shares ISA is the money you make from your investments. For example, if your shares’ value goes up or you receive dividends from them – it is not taxed. It could mean that your investments grow more quickly than they would if you were paying taxes.
Lifetime ISAs are savings accounts you can open from 18 to 39. You can save up to £4,000 yearly, and the government will add a 25% bonus. So, if you keep a maximum of £4,000 a year, you’ll have £5,000 in your Lifetime ISA after 12 months.
You can use it to buy your first home or save for retirement. With a Lifetime ISA, you can save up to £1 million and still get the government bonus.
Help to Buy ISAs are designed to help first-time buyers save for a deposit for their first home. When you buy your first home, the government will boost your savings by 25% (up to a maximum of £3,000).
You can open a Help to Buy ISA if you’re a first-time buyer aged 16 or over and have never owned a property in the UK or abroad.
Innovative Finance ISAs are a new type of ISA that launched in April 2016. They allow you to invest in things like peer-to-peer loans and debt securities through platforms approved by HMRC.
The investments made through an Innovative Finance ISA are not covered by the Financial Services Compensation Scheme (FSCS), so your money is at risk if the platform you’re investing in fails.
You can open a Junior ISA if you’re under 18. You can save up to £4,368 in the 2019/20 tax year, and the money is held until you reach 18, when it automatically transfers into an adult ISA.
The investments you can hold in a Junior ISA are the same as those in a stocks and shares ISA.
The main reward of a Junior ISA is any money you make from your investments. For example, if your share’s value goes up or you receive dividends from them – it is not taxed.
The money you save into an ISA is tax-free, which means you don’t have to pay any income tax or capital gains tax on the interest or profits you make.
You can access your money anytime with a cash ISA without losing tax benefits. With stocks and shares ISA, there may be restrictions on when you can access your money, depending on your investments.
If you move your money from one ISA to another, this is known as transferring your ISAs. You can share your ISAs as often as you want, but you must ensure that the new ISA provider accepts transfers.