Guide to ISAs

An ISA (Individual Savings Account) is a UK tax-free savings or investment account, letting you save up to £20,000 per year without paying income or capital gains tax. There are several types, including Cash ISAs, Stocks and Shares ISAs, Lifetime ISAs (with a 25% government bonus), and Junior ISAs. Each is suited to different financial goals, and the allowance resets annually.

What is an ISA?

An ISA (Individual Savings Account) is a tax-free savings or investment account available to UK tax residents. It allows you to make the most of your ISA allowance, maximising the potential returns on your money as it is exempt from income tax, tax on dividends, and capital gains tax. Think of it as a protective shield around your money, keeping it safe from government taxes. By using an ISA, you can keep more of your hard-earned cash and avoid paying tax on it.

For the tax year 2025/2026, you can contribute a maximum of £20,000 across your ISA accounts, which can be spread across different types of ISAs. That’s the total limit across all accounts — you can put the entire £20,000 into just one ISA or split it between various types. But before diving into the specifics, it’s important to understand how an ISA works.

So how does an ISA work?

An Individual Savings Account (ISA) works much like a regular savings or investment account but with the added benefit of tax advantages. One of the key features is the flexibility in how you use your annual ISA allowance. While you can invest the full amount into a single ISA, you also have the option to spread it across different types of accounts. For example, you could divide your allowance between a cash ISA, stocks and shares ISA, or an innovative finance ISA. We'll go into more detail on this shortly.

If you earn interest on your savings, the amount you can keep without paying tax depends on how much you earn and what tax bracket you're in. You can earn up to £1,000 interest tax-free if you're a basic rate taxpayer. Higher rate taxpayers can have up to £500 tax-free; additional rate taxpayers don't get any tax-free allowance and pay 45% tax on all their interest

Different ISA Types Explained

The good thing here is that you can choose from different accounts. There are different types of ISA accounts you can put your money in one of each kind of ISA each tax year. Let's understand them briefly:

How do Cash ISAs work?

A cash ISA operates similarly to a standard savings account, but with one major benefit: the interest earned on your savings is completely tax-free. This means that, unlike regular savings accounts, you don’t have to pay any income tax on the interest you accumulate, making it a great option for those looking to save without losing part of their earnings to taxes.

The interest rates can vary depending on the provider, but the key advantage remains the tax-free nature of the returns. Alternatively, if you are deciding between Stocks and Shares ISA vs a Cash ISA, the latter offers a different way to grow your money, allowing you to invest in a range of assets while still benefiting from tax-free profits.

How do Stocks and Shares ISAs work?

A Stocks and Shares ISA is a tax-efficient investment account offered by UK stockbrokers, designed for individuals who want to grow their money by investing in stocks, bonds, or other securities. The major benefit of this type of ISA is that any profits made through investments, whether capital gains or income from dividends, are exempt from both capital gains tax and income tax, as long as the deposits stay within the annual contribution limit.

This makes it an ideal vehicle for those looking to invest in the stock market with tax advantages. To make the most of these benefits, it's important to choose the best UK Stocks and Shares ISA for your investment goals and risk appetite.

How do Innovative Finance ISAs work?

An Innovative Finance ISA (IFISA) allows individuals to lend money to other borrowers through the peer-to-peer lending market, enabling them to use their annual ISA allowance in a non-traditional way. Essentially, you’re lending funds to individuals or businesses in exchange for interest, and any interest earned from this lending activity is tax-free.

It's an appealing choice for those seeking potentially higher returns than those offered by traditional savings accounts, but it does come with higher risks associated with the lending market.

How do Lifetime ISAs work?

A Lifetime ISA (LISA) is specifically designed to help individuals save for their first home or for retirement. The government encourages saving by offering a 25% bonus on contributions, up to a certain limit each year. For example, if you contribute £4,000 annually, the government will add a £1,000 bonus. This makes it a highly effective savings tool for those planning to purchase their first property or planning for their retirement, as long as the funds are used for one of these two purposes.

There are age limits for opening and contributing to a LISA, and withdrawals before age 60 (unless for buying a first home) incur a penalty.

How do Junior ISAs work?

A Junior ISA (JISA) is a tax-free savings or investment account aimed at helping parents and guardians save for their children’s future. Available for those under 18, Junior ISAs allow both cash and stocks and shares options, enabling children to accumulate savings or investments without paying tax on the interest or returns. To make the most of this opportunity, it's important to choose the best Junior ISAs based on your child's long-term goals and your preferred investment approach.

The account is managed by the parent or guardian until the child turns 18, at which point the funds become accessible to the child. It’s a great way to build long-term wealth for the younger generation.

How do Flexible ISAs work?

A Flexible ISA allows account holders to withdraw and replace money without affecting their annual ISA allowance. In contrast to standard ISAs, where withdrawals count towards your yearly limit, a flexible ISA gives you the flexibility to replace the amount withdrawn in the same tax year without reducing your contribution room. This feature makes it a useful option for those who may need to access their savings occasionally while still benefiting from the full tax advantages of the ISA scheme

But with an inflexible account, you lose part of your allowance for that year if you take out money. For instance, let's say you put £10,000 into an ISA. If you then take out £2,000 from an inflexible ISA, you can only put back a maximum of £10,000 in that same account for the year. So, you'll only have invested £18,000 for that tax year because of the £2,000 you took out.

What is the ISA allowance?

The ISA allowance is the maximum amount of money you can contribute to your ISAs in a single tax year. For the 2025/2026 tax year, the ISA allowance is £20,000. This can be split across different types of ISAs (such as Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs, etc.), but the total amount you contribute to all your ISAs cannot exceed this limit.

For example, you could put:

• £10,000 into a Cash ISA
• £5,000 into a Stocks and Shares ISA
• £5,000 into an Innovative Finance ISA

As long as the total adds up to £20,000, you're within the limit.

Remember, the allowance resets every tax year, so you have a new £20,000 limit each year, and any unused portion of the allowance does not carry over.

Withdrawing from an ISA

There is generally no penalty for withdrawals for Cash ISAs and most Stocks and Shares ISAs. However, there are rules when it comes to withdrawing funds from a Lifetime ISA before age 60, unless it's for buying your first home, typically incurs a 25% penalty on the amount withdrawn. It's important to check the specific terms of your ISA for any provider-specific restrictions or penalties.

Can I open an ISA?

To open an ISA account, you must also be either:

• Tax-residents 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

Also, certain age requirements must be met:

• 16+ for cash ISA
• 18+ stocks and shares or innovative finance ISA
• 18+ but under 40 for a Lifetime ISA

Holding an ISA on behalf of someone else is not permissible. However, children under 18 can have a Junior account. In cases where an individual lacks the mental capacity to open and manage the account, a close friend or relative can seek a financial deputyship order from the Court of Protection (COP) to handle these responsibilities.

Can I have more than one ISA?

Yes, you can have multiple ISA accounts, but you can only contribute to one of each type of ISA per tax year. So, how many ISAs can I have? You can have several, such as a Cash ISA, a Stocks and Shares ISA, and an Innovative Finance ISA, but you can only contribute to one of each type in a given tax year.

The total amount you can contribute across all your ISAs is capped by the annual ISA allowance, which is £20,000 for the 2025/2026 tax year.

Can I open a joint ISA?

No, you cannot open a joint ISA in the UK. ISAs are individual accounts, meaning each person is allowed to open their own ISA in their name. However, if you and a partner or spouse want to save or invest together, each of you can open your own ISA and contribute up to the annual limit (£20,000 for the 2025/2026 tax year).

While you cannot combine contributions into a joint account, this still allows both individuals to benefit from the tax advantages of ISAs. Some couples may also choose to open cash ISAs or Stocks and Shares ISAs separately and use other shared accounts for joint savings.

To summarise

Money growing with a little extra magic – that’s what ISAs can do, helping you earn more on your savings while saving on tax, too. All the interest or profits you make inside this account are tax-free, meaning more of your money stays with you to help reach your savings goals faster. ISAs are also flexible; unlike some savings plans, you can usually access your cash whenever you need it, without facing penalties.

Having a safety net for emergencies gives you peace of mind. Opening an ISA is a smart financial move that can help you make the most of your money. Before making any decisions, be sure to read all the details carefully to avoid any surprises down the line.

FAQs

Can I transfer my ISA to another provider?

Yes, you can transfer your ISA from one provider to another. Importantly, you must use the official ISA transfer process to retain the tax-free status of your funds; simply withdrawing and redepositing will not preserve the benefits.

Can I invest in crypto through an ISA?

Direct investment in cryptocurrencies like Bitcoin or Ethereum is prohibited in ISAs because they do not meet the eligibility criteria set by the UK's Financial Conduct Authority (FCA). However, a Stocks and Shares ISA allows you to invest in crypto-related stocks or certain funds that might have exposure to cryptocurrencies.

ISA Account Vs Savings Account?

Even if both products are intended for saving purposes, the main differences lies on the following items:

Cash ISA Account vs Savings Account?

Based on the previous information, we could say that a Savings account and a Cash ISA account are very similar as they both depend on the cash or money placed in each account. However, there is a key difference: Cash ISA accounts don't have income tax on interest earned.

Below is a comparison table that outlines the main differences between a Cash ISA and a regular savings account, highlighting key aspects such as tax benefits, contribution limits, interest rates, access to funds, and usage flexibility.

What happens to my ISA if I move abroad?

If you move abroad, you can't continue contributing to your ISA unless you are a UK resident for tax purposes. However, you can keep your ISA open, and it will continue to enjoy tax-free status on the returns from your existing contributions.

What happens if I exceed my ISA allowance?

If you exceed your ISA allowance, we recommend that you discuss it with your provider. Note that they should remove the excess from your ISA and the possible interest generated from such excess. This excess should be declared and taxed.

How to open an ISA account?

Here's a step-by-step guide on how to open an ISA account:

1. Research and choose a provider:

• Compare ISAs offered by different banks, building societies, credit unions, and other financial institutions.
• Consider factors like interest rates, fees, account types (cash, stocks and shares, innovative finance, Lifetime), and minimum deposit requirements.

2. Apply for your chosen ISA:

• This can usually be done online or in the branch.
• You'll need to provide personal details like your name, address, and date of birth, as well as financial information like your employment status and income.
• Complete the application form provided by the account provider.

3. Verify your identity:

• The provider will need to verify your ID to comply with regulations. This may involve uploading a copy of your passport or driving licence.

4. Fund your account:

• You can usually transfer money from your current account to fund your ISA. Some providers may have a minimum deposit requirement. The minimum deposit amount will vary depending on the provider and the type of account you’re opening. Follow the instructions provided by the provider to transfer funds into your new account.

5. Choose how to manage your account:

• Some ISAs, particularly Stocks and Shares, allow you to choose investment options. You may want to seek financial advice if you're unsure how to invest your money.

And you are done. Now, you don't have to worry about taxes eating your money, and you can earn more with these accounts.