What is an ISA?

An ISA allows individuals to save or invest money in a tax efficient way. The main difference between an ISA and any other savings accounts is that an ISA offers tax-free interest payments.

The main types of ISA:

Cash ISAs - A cash-only savings account based on a fixed or variable rate
Stocks and Shares ISAs - Also known as Investment ISAs, that allow individuals to hold a wide range of assets, unlike cash ISAs. These can fall in value as well as rise.
Innovative Finance ISAs - These are a higher risk option that lets individuals lend savings out to borrowers through peer-to-peer lending platforms, where interest is earned tax free.
Lifetime ISAs - A lifetime ISA could help individuals to get on the property ladder for this first time or contribute towards their retirement savings.

In addition, a Junior ISA or JISA allows investment to be made on behalf of a child. The child does not pay any tax on the income they earn or returns they make. The savings limit is £9,000 and the child must be under 18 and living in the UK to qualify. There are two types of Junior ISA - a cash Junior ISA and a stocks and shares Junior ISA.

An individual could put money into most types of ISA each tax year.

Who can open an ISA?

To open an ISA, you must be:

16 or over for a Cash ISA
18 or over for a Stocks and shares or Innovative finance ISA
18 or over but under 40 for a Lifetime ISA

You must also be either:

resident in the UK
a Crown servant (for example diplomatic or overseas civil service) or their spouse or civil partner if you do not live in the UK.

You cannot hold an ISA with, or on behalf of, someone else.

What is the ISA allowance?

The ISA allowance is the most an individual can save in an ISA in each tax year. For 2022/23, the allowance is £20,000.

The ISA allowance is the maximum amount of money that you can put into ISAs each year. It does not include the total amount that's in your ISAs from previous tax years, or the money you earn from investments in your ISA.

Cash ISAs

Cash ISAs are tax-free savings accounts based on a fixed or variable rate. They are open to UK individuals aged 16 or over. There are different types of Cash ISAs which include easy access (allowing individuals to withdraw cash when they require), fixed rate (where a guaranteed interest rate is agreed but cash is locked in for a set time) and a variety of other types.

Individuals can only have one 'active' Cash ISA in each tax year, meaning they cannot open multiple Cash ISAs in a single tax year and benefit from the tax-free savings allowance in each of these Cash ISAs.

Stocks and Shares ISAs

With a Stocks and Shares ISA you can put money into an ISA and use it to buy shares, funds and other types of investments. The ISA acts as a 'wrapper' which means you have no tax to pay on dividends, growth or income you get from the investments.

You can open a Stocks and Shares ISA with a lump sum or make regular contributions from as little as £20 per month.

Please note: The value of your investments can go down as well as up, so you may get back less than you first put in.

Innovative Finance ISAs

Innovative Finance ISAs are a higher risk option that lets individuals lend savings out to borrowers through peer-to-peer lending platforms, where interest is earned tax free. Peer-to-peer lending matches up investors, who are willing to lend, with borrowers, who could be individuals, businesses, or property developers.

Please note: The value of your investments can go down as well as up, so you may get back less than you first put in.

Lifetime ISAs

A Lifetime ISA could help individuals to get on the property ladder for this first time or contribute towards their retirement savings. Lifetime ISAs let you save up to £4,000 every tax year towards a first home or towards retirement, with the State adding 25% bonus on top of what you save. This means you could receive £1,000 of free cash annually in addition to receiving interest on what you save. You can use the savings to help buy your first home only if all the following apply:

the property costs £450,000 or less
you buy the property at least 12 months after you make your first payment into the Lifetime ISA
you use a conveyancer or solicitor to act for you in the purchase - the ISA provider will pay the funds directly to them
you're buying with a mortgage.

You can choose to save in cash, or invest in the stock market, and as with other ISAs, your money can grow free from UK tax. However, you can only withdraw money from your Lifetime ISA if you are:

buying your first home
aged 60 or over
terminally ill, with less than 12 months to live

You'll pay a withdrawal charge of 25% if you withdraw cash or assets for any other reason (known as making an 'unauthorised withdrawal').