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Your guide to the different types of ISAs

ISAs have a reputation for being a bit complicated, but this really shouldn’t be the case. ISAs are just a type of personal savings (or investment) account offering tax-free interest. This guide explains the various types of ISAs along with the pros and cons of each.

If you’re thinking about opening an ISA, your first decision is what type of account to go for.

So, to help you make your choice, we explain how ISAs work—as well as the benefits and drawbacks of each account type.

What is an ISA?

An ISA is an 'Individual Savings Account'.

While an ISA can sound like a complex financial thing, it’s actually pretty simple. ISAs are just personal savings or investment accounts. Unlike a traditional savings account (where you pay tax on any interest above £1,000 for basic rate taxpayers or £500 for higher rate taxpayers), you don't pay any income tax or capital gains tax with an ISA if you remain within the tax allowance.

Each tax year (which runs from 6 April to 5 April in the UK), you get what’s known as an ISA allowance. This is the maximum amount you can save within this tax-free bracket. At the time of writing (January 2023), this is £20,000 for the current tax year.

ISAs were introduced by the UK government in 1999 to help people with their savings. Over two decades later, we’ve got five types of ISAs to choose from.

These are:

Keep reading—we’ll dig into each of these ISAs in a bit more detail below.

Who can get an ISA?

You can open an ISA if you’re a UK resident. If you’re a 'crown servant' (i.e., civil servants, diplomats or members of the armed forces), you can also open an ISA even if you’re overseas.

You must be at least 16 before you can open a Cash ISA. For Stocks and Shares, Innovative Finance, and Lifetime ISAs, the legal age for opening one of these accounts is 18. (More on these different types of ISA below).

For anyone under the age of 16, there is the option of a Junior ISA. This lets a parent or legal guardian open an account for their child.

What are the different types of ISA?

Here’s a bit more information on the rules and the pros and cons of the five main ISA types.

1. Cash ISAs

This is the most common type of ISA product. You simply put your cash savings into the account and earn tax-free interest.

There are different Cash ISAs available, known as “fixed interest rate” or "variable interest rate" accounts. A fixed-rate cash ISA means your interest rate stays the same for a specified time. With a variable rate cash ISA, your interest rate can go up or down.

Pros

  • Fixed Cash ISA accounts can be great if you don’t need to dip into your savings in the next 1 to 5 years as some accounts make it difficult to easily withdraw money. Another option is an “easy access” account, which allows easier access to your money.
  • They’re easy to open and let you avoid paying tax on gains made within the £20,000 limit.
  • With cash ISAs your savings are protected if a UK bank fails. The Financial Services Compensation Scheme (the FSCS) covers you for the first £85,000 held with any Financial Conduct Authority (FCA) authorised provider.

Cons

  • Unless you have an 'easy-access account, you might have to pay a fee for withdrawals. Most Cash ISAs offering higher interest rates require that you “lock” your money away for a set amount of time — usually 2, 3 or 5 years.
  • If you’re aiming for higher returns, a Stocks and Shares ISA might be better — particularly if you're offered low-interest rates on your Cash ISA.
  • If you earn less than £1,000 in investment gains each tax year, there aren’t any real terms tax benefits. This could make higher-rate savings account a better choice.
  • Fixed-term and fixed-rate ISAs are just that. Fixed. If interest rates rise and you can get a better rate on your savings elsewhere, does it still make sense to have your cash locked away?

2. Stocks and Shares ISAs

You might also hear a Stocks and Shares ISA referred to as an “Investment ISA”. These accounts help you to invest your money rather than just saving it.

What does this mean in practice?

Well, this means your money is invested in things like stocks and shares (where people buy stakes or shares in businesses, which are traded on the global stock market), bonds (when money is loaned to a company or government, which will give interest payments on the amount loaned) or other investment funds (groups of shares and bonds, where you buy a stake in the fund itself).

Like a Cash ISA, any gains or income you make on the money you invest up to £20,000 per tax year is free of tax.

Pros

  • Stocks and Shares ISAs usually offer higher interest rates than Cash ISAs.
  • If you’re saving for the long term, this could bring more substantial returns than a Cash ISA.
  • Some providers (like us at CIRCA5000) also give you the opportunity to invest your savings sustainably in companies making a real-world positive impact.
  • Like a Cash ISA, a Stocks and Shares ISA is protected by the FSCS which covers the first £85,000 held with your UK FCA-authorised provider. This only covers instances where your provider goes bust though, not your investments losing value.

Cons

  • You might lose money if the value of your shares, bonds and funds go down. Stocks and Shares are a higher-risk option than Cash ISAs.
  • Different investment strategies bring distinct levels of risk. For instance, government bonds are usually more stable than company shares or corporate bonds.
  • These accounts sometimes come with higher charges (i.e. the amount you have to pay per year for the account) as well as how much money you have to deposit each tax year.

Remember, you can split your money between a Cash ISA and a Stocks and Shares ISA, as long as you stay under the £20,000 annual allowance.

ISA allowance breakdown
Example of ISA allowance

3. Lifetime ISAs (LISA)

Lifetime ISAs can be a valuable savings vehicle for first-time buyers or people saving for retirement. They replaced previous “Help to Buy” ISAs in 2017.

LISAs let you save up to £4,000 a year (tax-free). The government also give you a 25% bonus on top of anything you pay in (up to £4,000 per year) until you turn 50. This means if you save the full amount (£4,000), the government gives you an extra £1,000 each tax year. Or, if you save £1,000, the government will add an extra £250, giving you £1,250 at the end of the tax year.

The pros and cons are pretty simple here. The potential to earn an extra £1,000 is more than most interest rates. Despite this, Lifetime ISAs are designed for people saving for their first home or retirement. You can only withdraw money for these reasons and there are strict limits about when you can use the money. For example, the first home you're buying must be no more than £450,000.

If you think you’ll need your money for any other reason, a Lifetime ISA doesn’t make much sense. You might be better off with either a Cash or Stocks and Shares ISA.

4. Innovative Finance ISAs

An Innovative Finance ISA lets you lend your money to other borrowers (which could be individual people or businesses) through something called a “Peer-to-Peer” (P2P) Lending Platform.

These platforms connect lenders and borrowers without having to go through a traditional bank or building society. Because the rules for peer-to-peer loans are more flexible than most banks, they’re often used by start-ups and people looking to grow their companies.

Over a set amount of time, borrowers will pay back their loans (including any fees and interest). Like the other ISAs, any interest you earn is tax-free.

5. Junior ISAs (JISA)

If you want to open an ISA for someone under 16, then Junior ISAs let you do this.

With a Junior ISA, parents or legal guardians can open an account for their children. This allows you to save money for their future. The money is locked away until the young person turns 18. After this date, it’s their money and the JISA is automatically converted into an ISA. They can withdraw funds or reinvest in a different type of account.

Like adult ISAs, you’ll find Junior Cash ISAs and Junior Stocks and Shares ISAs. The pros and cons of these accounts are the same as the “adult” versions.

The CIRCA5000 Junior ISA is a Stocks & Shares ISA. The Junior ISA allowance for young adults is £9,000 for each tax year. This doesn’t impact the personal ISA allowance of £20,000 for the parent or guardian who has set up the account.

How much money can I save in an ISA?

ISAs are just like any other savings or investment account, but with a few more tax rules. No matter what kind of ISA you choose, the maximum you can save (in a single year) is £20,000.

You might decide to invest your full annual ISA allowance (up to £20,000) into a single account. Alternatively, you can split this between different ISA types — as long as you don’t go over the allowance limit.

You must save or invest your money by 5 April (the end of the tax year) for it to count towards that year’s allowance. Any unused allowance doesn’t roll over… so if you don’t use it, you lose it.

For most ISAs, any money you withdraw still counts towards your annual allowance.

This means switching ISAs is fine, as long as you transfer money directly to your new provider. If you personally withdraw your savings and then pay them into another ISA, you could lose your allowance for that tax year.

What happens if I go over my ISA allowance?

If you go over your ISA allowance and pay in more than £20,000 in a tax year, don’t worry.

If it’s the first time, you’ll probably receive a warning from HMRC. Alternatively, HMRC might ask your ISA provider to remove the amount you’ve gone over by, and tax any interest or returns related to this money.

If you’ve gone over your ISA allowance, contact HMRC straight away. They’ll give advice on your best course of action.

Summary

ISAs are a highly tax-efficient way of saving. Just make sure you stay under the £20,000 ISA allowance each year, and you’re good to go. If you find yourself with more than £20,000 to save or invest each year, then it could be worth considering a General Investment Account, or GIA.

Disclaimer

​​When you invest, your capital is at risk. You should consider whether opening a CIRCA5000 ISA or transferring your ISA is right for you. Please note that tax rules and reliefs may change depending on your circumstances. CIRCA5000 does not provide any financial or tax advice, and you are responsible for your own tax reliefs/payments. This article does not represent financial advice.

Important information - Investments can go down in value as well as up, so you can get back less than you invest. The information on this page isn't investment advice. If you're not sure if an investment is right for you, please seek advice. Tax rules can change and depend on individual circumstances.