What is an Isa?

Isas

What is an Isa?

By Chiara Cavaglieri

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What is an Isa?

Everything you need to know about the entire Isa family, from the original cash Isa to new innovative and lifetime Isas. 

 

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Video transcript

Individual Savings Accounts or ISAs don't sound very interesting, but they're so much more than a regular savings accounts. In fact if you are thinking of saving for the first time they should be your very first pot of gold. There's one simple reason for that and that's tax or more accurately the lack of it.

Any interest you earn on an ISA is tax free, so they can often trump even the best returns from ordinary savings accounts. But it gets better beyond standard ISAs with variable interest rates. There are three more types that could earn you even more. Fixed rate ISAs which lock in your cash in exchange for a better rate, regular savings ISAs that give you a better rate for people that pay in every single month, and finally stocks and shares ISAs.

A stocks and shares ISA has the potential to give you a better return than a cash ISA. As with any stocks and share investment though you take the risk but your balance could go down as well as up. Recent changes make ISAs even more attractive but watch out there're lots of rules that govern how you manage your ISA and how you switch.

To get the full low down on each type of ISA and what you can and can't do with it, as well as the best ISA rates available visit which.co.uk/ISAs.

What are the different types of Isa?

Isas are tax-free savings or investment accounts offered by banks, insurers, asset managers, building societies and National Savings & Investments (NS&I). 

The Isa is now available in more guises than ever. Here, we help you understand your options – and how to make the most of your allowance. 

Types of Isa
  Aka What is it? Allowance 2016-17 Allowance 2017-18 Tax breaks Bonuses Providers
Cash Isa Basic Isa Savings account £15,240 £20,000 Tax-free interest n/a Banks and building societies
Stocks and shares Isa Investment Isa Investment account Tax-free gains, no further tax on dividends, tax-free interest Fund supermarkets, stockbrokers
Innovative Finance Isa Peer-to-peer Isa Peer-to-peer lending account Tax-free interest Peer-to-peer lending firms
Lifetime Cash Isa Lisa House deposit and/or retirement savings and investment accounts for first-time buyers and/or under 40s n/a £4,000a Tax-free interest 25% top-up on contributions up to £4,000 a year Banks and building societies
Lifetime stocks and shares Isa Tax-free gains, no further tax on dividends, tax-free interest Fund supermarkets, stockbrokers
Help to Buy Isab H2B Isa Savings account for first-time buyers £3,400 £3,400 Tax-free interest 25% top-up Banks and building societies
Junior Cash Isa Jisa Savings and investment accounts for under 18s £4,080 £4,080 Tax-free interest n/a Banks and building societies
Junior stocks and shares Isa Tax-free gains, no further tax on dividends, tax-free interest Fund supermarkets, stockbrokers
Additional options
Inheritance Isas A term some providers are using to describe accounts that will accept Isa balances inherited from deceased spouses. The surviving spouse gets to subscribe the balance of the deceased's Isa in addition to their own allowance for the tax year. Some banks and building societies, fund supermarkets, stockbrokers
Flexible Isas A variation on cash and stocks and shares Isas that incorporates new rules allowing you to add money, then withdraw it, and then add it again without using up more of your allowance.
Notes: Merged cells indicate that your contributions can be split between two or more types of Isa in the same tax year. Lifetime Isas available from 2017-18.
a Lifetime Isas have a limit of £4,000, which is part of the £20,000 allowance.
b You can't open a help to Buy Isa and a cash Isa in the same year, but some products offer 'split' Isas allowing you to have both up to the allowance maximum.

What is a cash Isa?

A cash Isa is essentially the same as a traditional savings account, except there are limits on the amount of cash you can transfer in and there is no tax to pay on the interest you earn.

In the 2016/17 tax year, you can put £15,240 into a cash Isa. 

Best Rate cash Isas will often offer a better return once tax is taken into consideration. 

However, all basic- and higher-rate taxpayers are now entitled to the new personal savings allowance, which was introduced on 6 April 2016. 

This means basic-rate taxpayers can earn interest of up to £1,000 on non-Isa savings without owing any tax (falling to £500 for higher-rate taxpayers). Interest earned above these thresholds is still taxable at 20% or 40%.

Find out more: Which? savings and Isa comparison tables - compare hundreds of deals  

You must consider your individual circumstances before opening a cash Isa to make sure your chosen account is the best one for your needs. There are three principal types of cash Isa, explained below.

Instant access cash Isas

This type of Isa provides savers with the ability to pay in and withdraw money at any time throughout the tax year. 

Some let you pay in and withdraw any amount, while others will place annual limits on your withdrawals, or demand minimum deposits from customers.

One thing to remember is that instant-access cash Isas often have variable rates of interest - the price you pay for the luxury of moving cash in and out of your account freely. 

If interest rates rise, you could see the value of your savings rise. Conversely, if interest rates drop, this could negatively affect the return you receive.

Which? Money Compare table: Instant access cash Isas - all available deals compared.

Fixed-rate cash Isas

If you’re looking to tie up your savings for a while, you might want to consider a fixed-rate cash Isa. These lock away your money for a set period, usually between one and five years, and in return pay you a higher interest rate. Generally, the longer you tie up your money, the better the interest rate you will receive.

It’s important to note that fixed-rate cash Isas do not allow you to withdraw your money at any time - you forgo the flexibility of easy access to your savings in return for a top rate. So, if you want to access your cash at any point, you may face a penalty, either in the form of a fixed fee or a reduction in your interest rate.

Fixed-rate cash Isas often require a lump sum investment rather than regular savings. If you want to maximise the tax efficiency of your Isa and are able to put a large chunk aside of cash in one go, this is your best option.

Which? Money Compare table: Best fixed-rate cash Isas - compare deals

Regular savings cash Isas

These cash Isas will pay a fixed rate of interest over a set period - usually a year - on the provision that you make a regular monthly savings contribution. 

This monthly deposit is limited to your savings allowance within the Isa. In the 2015/16 tax year, you can contribute a maximum of £1,270 per month without exceeding your total limit of £15,240. 

Again, it's likely you will not be able to withdraw any of your savings from a regular savings cash Isa, and pay face a penalty if you do so.

Which? Money Compare table: Regular savings cash Isas - compare deals

What is a Help to Buy Isa?

This new type of Isa is aimed specifically at would be first-time buyers.

For every £200 contributed, the government will add an extra £50 towards a deposit on your first home, up to a maximum of £3,000.

You can't contribute to a cash Isa in the same tax year as a Help to Buy Isa. Therefore, if you want to open a Help to Buy Isa in the current tax year, make sure you don't add any money to a cash Isa as well.

Find out more: Help to Buy Isas - our two-minute video explains all you need to know  

What is a stocks and shares Isa?

In a stocks and shares Isa, all capital gains and income are protected from tax. 

You can learn more about how these accounts work in our guide titled stocks and shares Isas explained.  

What is an 'innovative finance' Isa'? 

This new type of Isa lets you invest in peer-to-peer (P2P) lending - where you lend cash to individuals or small businesses - without paying tax.

The platform you choose will be able to set up your account so that the interest paid by borrowers is kept within a tax-free Isa wrapper. 

Find out more: peer-to-peer lending explained - get to grips with the risks. 

Mini and Maxi cash Isas, TOISAs and PEPs

Isas were originally available as mini Isas (cash only, or stocks and shares only) and maxi Isas (cash, and stocks and shares). 

TOISA stands for TESSA-only Isa. These accounts were originally created for people who had invested in TESSAs (Tax-Exempt Special Savings Accounts) - an older type of tax-free savings vehicle which was phased out of existence when Isas were introduced. 

PEP stands for Personal Equity Plan. These were tax-efficient savings products that allowed people to invest in stocks and shares, but new investment in PEPs was stopped in 1999 to coincide with the introduction of Isas. 

In April 2008, all of these products were reclassified as either cash or stocks and shares Isas. 

  • Last updated: September 2016
  • Updated by: Chiara Cavaglieri