ISAs – What are they and how do ISAs work?
What is an Individual Savings Account (ISA)?
An ISA, or Individual Savings Account, is a savings account that you never pay any tax on. It does come with one restriction, which is the amount of money you can save or invest in an ISA in a single tax year – also known as your annual ISA allowance. Currently for the 2019/2020 tax year this allowance is £20,000.
It helps to think of an ISA as a protective box: the things you put inside are protected from tax and there are two basic types of ISA to choose from – Cash ISAs and Stocks & Shares ISAs.
What is a Cash ISA?
Cash ISAs are more like an ordinary savings account: you pay cash in and it earns interest, tax free.
What is a Stocks & Shares ISA?
The ISA for investments is called a Stocks and Shares ISA: rather than simply saving, you are investing in things like stocks and shares, bonds, gilts or commercial properties to help your savings grow over time and any interest or returns you get are tax free.
Stocks and Shares ISAs may have the potential for quicker or greater growth, but because they are based on the stock market there’s always a risk the amount of money in your ISA could go down as well as up.
ISAs come in different shapes and sizes
In addition to the basic Cash ISA and Stocks & Shares ISA, different types have been created, to help people save for different things such as:
- Lifetime ISA – to help you save towards your first home or your retirement
- Help to Buy ISA – to help you save towards your first home
- Junior ISA – to help you save for you children
To help you compare the different ISAs and choose the right kind, read our blog on choosing the best ISA for you.
How do ISAs work?
If you live in the UK and are over 16 years old, you’re entitled to save a certain amount of money in an ISA every year. This is called your ‘ISA allowance’ and the exact amount can change from year to year. For example, in the 2017/18 tax year the annual ISA allowance was increased from £15,240 to £20,000.
Once your money is in an ISA it can’t be taxed, no matter how many years you have it in there. Take a look at our ‘Frequently Asked ISA questions’ blog for more details on how ISAs work.
What are the benefits of an ISA?
- Your money will grow tax free
- The annual allowance for 2019/2020 is £20,000
- Your annual allowance starts afresh each new tax year
- You can transfer existing ISAs into your new ISA
- Children aged between 16 and 18 can hold both a Junior and a standard Cash ISA
- Specific ISAs are available to help when saving towards your first home or retirement.
The content of this article is for information purposes only and does not constitute financial advice. We do not offer financial advice. If you’re unsure as to the suitability of a product you should seek advice from a Financial Adviser. You may have to pay for this advice.