Individual Savings Account (ISA) Explained

The Individual Savings Account (ISA) was introduced in 1999 and they have since become one the most popular and tax-efficient methods of saving and investing. 

There are now five main types of ISA, catering for the differing risk profiles and saving and/or investment goals of investors in the UK.

What are the different types of ISA?

There are four types of adult ISA currently available:

- Cash ISA

- Stocks and Shares ISA

- Innovative Finance ISA (IFISA)

- Lifetime ISA

There's also a fifth type of ISA, designed specifically for children and young people, called the Junior ISA.

What is an ISA?

An Individual Savings Account (ISA) is a type of savings and investment account that benefits from a tax wrapper, allowing you to save and/or invest without paying tax on any interest you earn or any profits you make. ISAs were set up in 1999 to encourage saving and investment and they provide a way of investing up to £20,000 a year (in the 2020/21 tax year) without paying tax on the investments.

Who can open an ISA?

To be eligible to open an ISA, you must;

- Be a UK resident 

- Be aged 16 or over (Cash ISA)

- Be aged 18 or over (Stocks and Shares ISA and IFISA)

- Be aged 18 - 39 (Lifetime ISA)

What is the annual ISA allowance?

The current annual ISA allowance for the 2020/21 tax year is £20,000. There are a number of different ISAs, and each have their own rules regarding subscription limits that you should be aware of before deciding where to allocate your ISA allowance.

How many ISAs can I have?

Each tax year runs from April 6th to April 5th, and (if you are over 18 years old) you are able to open and subscribe funds to four ISAs per tax year - one Cash ISA, one Stocks and Shares ISA, one IFISA, and one Lifetime ISA. However, you can actually accumulate and have as many ISAs as you want.

Are ISAs worth it?

If you are considering opening an ISA, it is important that you think about whether or not they are the best option for you, and whether they are still a good place for your money.  

There are a number of differences between ISAs and traditional savings accounts, the main one being the tax wrapper. While all savings interest on ISAs is tax free forever, this is not the case with traditional savings accounts. 

What are the benefits of an ISA?

The main benefit of an ISA is the tax-wrapper, making any returns generated from savings and/or investments tax free. This means that you don’t pay tax on profits on stocks and shares held within your Stocks and Shares ISA, on interest earned on bonds, or on dividend income. 

Can I transfer an ISA?

Yes, you can transfer an ISA from one provider to another (as long as they accept transfers). You can also choose to transfer to the same type of ISA, or to a different type.

The Innovative Finance ISA Guide

A comprehensive free guide providing experienced investors with an overview of the Innovative Finance ISA (IFISA) and information on how high earners can use it to make their money work harder.

This guide explains how you can;
- diversify your portfolio with P2P loans or unlisted bonds
- manage risk by understanding the underlying asset classes
- potentially achieve a better return on your investment
- use an IFISA as part of your retirement planning strategy