An ISA (Individual Savings Account) is a tax- efficient way to save and invest money in the UK. They key benefit of an ISA is that any interest, dividends, or capital gains earned within an ISA are completely tax-free, meaning you don’t have to pay tax on the money you make.
Key features of ISAs
- Tax-free savings
- Annual allowance – you can contribute up to £20,000 per tax year (2024/2025 limit)
- Flexible options – you can split your options across different types of ISAs
- Withdrawal rules- some ISAs allow easy access, while others have restrictions
Types of available ISAs
Cash ISA
Works like a regular savings account but with tax- free interest. Available in easy access, fixed rate and notice accounts. These are best for low-risk savings and emergency funds.
However, the interest rate can be lower than other savings accounts.
Stocks and Shares ISA
Allows you to invest in stocks, bonds and other assets. The returns depend on market performance; there is a potential for higher growth but also risk of loss. These are best for long term investors who can handle market fluctuations.
The downside is that there are no guaranteed returns, as investments can go down as well as up.
Lifetime ISA (LISA)
These are designed for first-time homebuyers or for retirement savings. With this product you can save up to £4000 per year, and the government adds a 25% bonus, so if you put in the full £4000, you’d get a max government bonus of £1000. These can be in cash or stocks and shares. These are best for people looking to purchase their first home in the next few years, or for those wanting to start saving for retirement, and needs to be open for a full 12 months before you can get the benefit.
The biggest disadvantage of these is that if you withdraw the money before the age of 60 and not for a home purchase, you will face a 25% penalty. This actually means that you lose some of your own money. E.g. you put in 4k, the government gives you a 1k bonus so total amount saved is £5000. Then 25% of this is £1250, so you end up with only £3750 of your own money back.
Innovative Finance ISA (IFISA)
Invests in peer to peer lending rather than traditional stocks or savings accounts. These may come with potentially higher returns, but also higher risks as borrowers may default. These are best for experienced investors who are comfortable with risk.
The downside with this is that there is no FSCS (Financial Services Compensation scheme), so your money isn’t guaranteed.
Junior ISA (JISA)
These provide tax-free savings for children under 18. Parents can save up to £9000 per year on behalf of a child. These are available as cash or stocks and shares. They are best for long-terms savings for a child’s future, for university or a first home etc.
However, the child cannot access the money until they are 18 so this is something to be aware of.
