Back to insights listings

ISAs explained

As we head towards the new tax year, there will be a lot of talk about ISAs. So we thought a timely reminder of what ISAs are, who can have them, and how much you can save in them might be useful.

What is an ISA?

An Individual Savings Account (ISA) is a tax-efficient way of having savings, as you don’t pay any tax on the interest you earn, allowing you to make the most of the money you earn from your savings pot.  The Government sets limits on how much you can save in an ISA each year, with the ISA year running from 6 April to 5 April, in line with the UK tax system.

With ordinary savings accounts (excluding ISAs), any interest added is classed as income and taxed accordingly. However, the Personal Savings Allowance (PSA) allows basic rate taxpayers to earn up to £1,000 in savings interest tax-free, and higher rate taxpayers £500 tax-free interest. There is no PSA for additional rate taxpayers. Savers who earn interest on their savings (excluding ISAs) above their PSA must declare it in their tax returns.

What different types of ISAs are there?

There are several different types of ISAs available, and choosing the one that is right for you will depend on your own personal financial circumstances and your savings goals.

Cash ISAs are like ordinary savings accounts, with easy-access ISAs, fixed-rate ISAs and regular savings ISAs. There are also ISAs aimed specifically at young people (Junior ISAs), first-time homebuyers and those saving for retirement (Lifetime ISAs).

As with any savings account, the interest rates on Cash ISAs can vary, so shopping around to find the best account for you can make a difference. You can do this by visiting the branches or websites of savings providers, or by using sites that look across different providers and pull together the accounts with the best interest rates, such as Moneyfacts or Savings Champion.

As well Cash ISAs, there are Stocks and Share ISAs, where the money is invested in the stock market. The returns on Stocks and Shares ISAs are also tax-free, however the value of the investment can go down as well as up. These ISAs are more suited to those wishing to invest for a longer term and who are prepared to take an element of risk with their money.

What are the ISA limits?

The limit on the amount you can save in an ISA is currently £20,000 per person, each tax year. Depending on the ISA you choose, you can make regular payments or one-off lump sum deposits up to the annual limit. At the moment, you can only open and pay into one ISA of each type in each tax year, but this is changing from 6 April 2024.

Anyone over the age of 16 can open an adult Cash ISA, although this will also change to 18 from 6 April 2024. For Stocks and Shares ISAs, individuals must be aged 18 or over.

For young people, the Junior ISA savings limit is currently £9,000 a year, and individuals must be aged under 18. Family members and friends can make deposits into Junior ISAs, but the money is locked away until the child turns 18.

The Lifetime ISA, which is specifically for those saving to buy their first home or for their retirement, has a limit of £4,000 a year. This counts as part of the £20,000 limit for other types of ISA. In Lifetime ISAs the Government will add a 25% bonus to the savings each year, providing the conditions of the account have been met. Lifetime ISAs are available to those aged over 18 but under 40. You can use the savings to buy your first house, or once you are aged 60 or above. Accessing your LISA savings for any other purpose will mean you lose the bonus and pay a penalty.