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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. 

In this article
What is an Isa? What are the different types of Isa? Cash Isa Stocks and shares Isa Innovative finance Isa Help to Buy Isa
Lifetime Isa Junior Isa No longer available: Mini and Maxi cash Isas, TOISAs and PEPs Isas vs savings accounts Will an Isa affect my benefits? Can I have my stocks and shares, and cash Isa savings with one provider?

What is an Isa?

The term Isa stands for ‘individual savings account’, and allows you to save tax-free into a cash savings or investment account.

Isa accounts are offered by banks, building societies, insurers, asset managers and National Savings and Investments (NS&I).

This guide explains what the different types of Isas are and how they work, plus how to choose between an Isa and a savings account. 

 

What are the different types of Isa?

There are now five different types of adult Isas - all of which have the advantage of being tax-free. But that's where their shared similarities end. 

The table below shows you the key facts about each kind of Isa at a glance - you can find more details further down the page.

Cash Isa

What is it?

A cash Isa is essentially the same as a traditional savings account, except there are limits on the amount of cash you can deposit in each tax year, and you don't pay any tax when you earn interest.

There are three principle types of cash Isas:

  • Instant-access cash Isas: You can pay in and withdraw money at any time (though some accounts impose limits on this). They usually offer variable rates of interest.
  • Regular savings cash Isas: Usually pay a fixed rate of interest over a certain time, as long as you deposit a certain amount of money each month. You can contribute up to £1,666 each month without breaching the £20,000 annual limit.
  • Fixed-rate cash Isas: You'll need to commit to locking away your money for a fixed amount of time, in order to be rewarded with a fixed interest rate. Generally, the longer the term, the more interest you'll earn.

How much can I save each tax year?

In 2019-20 you can pay in up to £20,000 into a cash Isa. This was the same in 2018-19.

How does it work?

You're only allowed to open and pay into one cash Isa in each tax year - you can transfer your funds to a new Isa, but you'll have to transfer over everything you've deposited in the current tax year.

Who can open it?

Anyone over the age of 18 can open a cash Isa.

Find out more: Cash Isa rules and allowances

Stocks and shares Isa

What is it?

This is an investment account, where all capital gains and income are protected from tax. 

How much can I save each tax year?

In 2019-20 you can pay in up to £20,000 into a stocks and shares Isa. This was the same in 2018-19.

How does it work?

You can either opt for a managed account, where you'll pay fees for your investments to be sorted for you. Or, you can choose where to invest your money - but you'll likely still pay a fee to the provider.

You should factor in your attitude to risk before choosing your investments, as you may get back less money than you put in.

Who can open it?

Anyone over the age of 18 can open a stocks and shares Isa.

Find out more: What is a stocks and shares Isa?

Innovative finance Isa

What is it?

An innovative finance Isa - also known as an Ifisa - is an Isa that contains peer-to-peer loans. 

How much can I save each tax year?

In 2019-20 you can pay in up to £20,000 into an innovative finance Isa. This was the same in 2018-19.

How does it work?

This kind of lending matches investors with borrowers who did not want to/ could not get a traditional bank loan. These are usually individuals, businesses or property developers.

The borrower will offer a rate of interest when paying back the money you've invested.

Generally, the higher the interest rate, the higher the investment risk - you're not guaranteed to get all of your money back.

Who can open it?

Anyone over the age of 18 can open an innovative finance Isa.

Find out more: Innovative Finance Isas explained

Help to Buy Isa

What is it?

A government-backed cash Isa savings account to help first-time buyers get on the housing ladder.

How much can I save each tax year?

When you open the account you can deposit up to £1,200, then you can pay in up to £200 a month thereafter. So, in the first year you can save up to £3,400, and after that up to £2,400. Whatever you pay in will come out of your £20,000 Isa allowance.

How does it work?

The government pays a 25% bonus on what you save, up to a maximum of £3,000. The bonus is paid to your solicitor or conveyancer after you complete on your property purchase.

Who can open it?

Anyone who is a first-time buyer - but you'll have to apply before Help to Buy Isa scheme closes to new savers on 30 November 2019.

Find out more: Help to Buy Isas explained

Lifetime Isa

What is it?

A government-backed savings scheme to help people buy their first home and/or save for retirement. There are cash Isa as well as stocks and shares options.

How much can I save each tax year?

Up to £4,000 each year, which will come out of your £20,000 Isa allowance.

How does it work?

The government pays a 25% bonus on whatever you save up to a maximum of £1,000 each year. The bonus is paid into your lifetime Isa account each month.

If you use the money for retirement, you can only pay into the account until you're 50-years-old, and must wait until you're 60 to withdraw it.

Who can open it?

Anyone aged between 18-39. You must be a first-time buyer to put the money towards a property.

Find out more: Lifetime Isas

Junior Isa

What is it?

An account for young people aged under 18. There are options to save in cash or stocks and shares.

How much can I save each tax year?

Up to £4,368. This won't come out of your Isa allowance as the money is your child's, not your own.

How does it work?

You can pay into a Junior Isa each year until your child turns 18, at which time it will convert into an adult Isa and they'll gain control of the money that's been saved.

Who can open it?

Parents and legal guardians can open a manage a Junior Isa for the children they're responsible for. 

Find out more: Best Junior cash Isas

No longer available: 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.  

Isas vs savings accounts

The graphic below outlines the pros and cons of a savings vs Isa account.

How is an Isa tax-free?

The introduction of the personal savings allowance in 2016 took a lot of the potency out of the Isas tax-free advantage. Even the highest interest rates on the market would require a savings pot of many thousands of pounds before coming close to breaching the £1,000 personal savings allowance that basic-rate taxpayers receive.

However, for those with large savings pots, or who are additional-rate taxpayers and therefore do not receive any kind of personal savings allowance, an Isa is a great way to save paying tax on savings interest.

What's more, if you're saving over a long period of time - where your savings compound and grow as interest builds on interest - Isas protect you from ever having to pay tax in the future, even if you get a pay rise that reduces your personal savings allowance.

If you have a stocks and shares Isa, you'll also be spared from tax charged on traditional dividends if you exceed the £2,000 annual dividend allowance.

Will an Isa affect my benefits?

Money held within any kind of Isa is counted as savings, and therefore it can affect your entitlement to benefits.

Funds held in lifetime Isas can be particularly problematic, as having money saved means you could receive less in benefit payments, but you'll be penalised with a hefty withdrawal penalty if you remove money for any reason other than buying your first home or when you're over 60.

If you claim Universal Credit, any savings of more than £6,000 are assumed to give you a certain income (regardless of whether you actually receive any income from your savings or not), and this income - when added to any other sources - could reduce your Universal Credit payments.

If you have less than £6,000 saved, this won't have any effect on your payments.

If you have more than £16,000 in savings, you won't be able to claim Universal Credit at all

Can I have my stocks and shares, and cash Isa savings with one provider?

Some stocks and shares Isa providers also offer a cash Isa, however most people will still use a specialist for each.

This will enable you to secure the best cash Isa rates from a bank or building society, while investing in a stocks and shares Isa through a fund supermarket, such as Alliance Trust Savings, Hargreaves Lansdown or Interactive Investor. 

Holding cash in a stocks and shares Isa is usually only temporary until you decide where to invest it. If you have a large cash balance which you don't intend to reinvest later, it's still advisable to transfer this to a cash Isa with a bank or building society to get the best deal.

See Which? fund supermarket reviews to find out more about investment brokers.

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