The complete low-down on ISAs

Written by Anna Fedorova · 25.06.20

Anna is a financial journalist with nearly a decade of experience, specialising in investment and sustainable finance. Anna is also a rock climbing addict, travel enthusiast and a bit of a foodie.

Taxes…who actually likes paying taxes? Nobody. We all know they’re important, but no one actually likes to see hundreds of pounds going into the government’s coffers. Well, today we will give you a crash course in one of the best ways to keep the taxman’s hands off your hard-earned pennies: the humble ISA.

As ever, let’s start with the basics. The term ISA stands for ‘individual savings account’. It allows you to save or invest a set amount of money every tax year (which runs from 6th April to 5th April the following year) without paying a single penny (also called capital gains tax) to the taxman. Bingo.

Currently, the maximum amount you can put in this tax ‘wrapper’ is £20,000, which can be invested in one type of ISA or split between several, and the Junior ISA has an allowance of its own since it’s money you’re saving for your children, not yourself.

What are the different types of ISAs?

Putting as much as you can into an ISA every year should be as normal as a trip to the dentist, but trying to figure out which one to go for can give anyone a headache. To help you choose, here is the low-down on the different types.

Cash ISA

You can be forgiven if you don’t see much of a difference between this and a regular bank account. The one key difference is that you don’t pay tax on any interest you earn. You can find this at most banks and building societies and you can open one from the age of 16.

Cash ISAs range from instant access accounts, where you can get your money instantly like a bank account, to fixed-rate ISAs where you lock your money away for a period of time (usually 1-5 years), and the latter pays a higher interest rate. Now, you’re probably thinking: the interest on my bank account is tiny! And you’re right, with interest rates as low as they are, you won’t get anything mind-blowing from this ISA.

Stocks & Shares ISA

If you’re hoping for a bit more oomph, this ought to get you more excited. This ISA is all about investing and you can open one from the age of 18 and invest up to £20,000 a year. All profits and dividends you make are tax-free - YAY! And it also saves you a lot of hassle with your tax returns, and let’s be honest that alone is worth setting one up for!

You can use this ISA to invest in most stocks and shares, funds, investment trusts and ETFs – the whole shebang. And if there is anything you can’t invest in, then your broker or platform will tell you. As with all investment accounts, there will be fees attached to the account and the investments. For more information, please see the link at the end of the article.

Lifetime ISA

This is designed to be an alternative to the bank of Mum and Dad for those wanting to get onto the property ladder or are getting a helping hand with saving for retirement. This ISA can only be opened by people aged between 18-39. But don’t get too excited: you can only put up to £4,000 into this ISA each year, a drop in the ocean with the way house prices are going in some parts of the country! The government tops this up with 25% of whatever you save, but there is a catch: you have to use it towards a house or a pension pot, otherwise you lose your 25% bonus.

If you do like the sound of this it’s important to remember that the £4,000 limit comes as part of the overall £20,000 allowance, so it leaves you with another £16,000 to put in a different type of ISA.

Junior ISA

Maybe you’re worried about how much it will cost to send your children to uni, or you’d like to buy your daughter a car when she finishes school? This ISA was created just for this sort of occasion (well, probably more for the education than the car…)

You can put £9,000 into a Junior ISA every year, and it’s not even part of your £20,000 allowance, since it’s technically not your money. As with all the others, this can be saved as cash or be invested. As a parent or legal guardian, you have control of this ISA until your child turns 18, at which point it converts into an adult ISA in their name. For more information, please see the link at the end of the article.

Innovative Finance ISA (IFISA)

Last, but not least, the Innovative Finance ISA. This is a relatively new type of ISA that allows you to invest in peer-to-peer loans - sorry for the jargon! Essentially, this means you are lending money to individuals or companies that can’t, or don’t want to, get a traditional loan. You do this through an FCA-regulated firm, which pays you interest on your loan.

But since this is an investment, there is a level of risk involved and no guarantee that you will get your money back. This ISA isn’t covered by the Financial Services Compensation Scheme (FSCS).

An ISA is a great way to keep more of the pie to yourself so make sure you use as much of the £20,000 annual allowance as you are able to every year. Armed with this handy little guide, it shouldn’t be too hard for you to decide which ISA(s) you want to put this money into!

Please note that tax treatment depends on an individual's circumstances and may be subject to change in the future.

Further reading:
Tax on dividends
Personal savings allowance and tax on savings and investments explained

The information in this post is not financial advice, it is provided solely to help you make your own investment decisions. If you are unsure about whether an investment is appropriate for you, please seek professional financial advice. You can find more information here.

When you invest you should remember that the value of investments, and the income from them, can go down as well as up and that past performance is no guarantee of future return.

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