ISAs Explained Simply

Each tax year, every UK resident over the age of 16 gets an annual ISA allowance from the government.

This guide will explain what an ISA is, how much you can save and the types of ISA you could use to maximise your tax-free savings in 2021 and beyond.

Read on for all the information or click a link to jump ahead:

What are ISAs?

ISA is short for Individual Savings Account. The amount you can save in an ISA is set by the government each tax year. An ISA allowance lets you save your money tax-free and all the interest or capital growth you earn on your savings, including capital gains and dividends, is 100% tax-free.

Offering a tax-free savings allowance to every UK resident aged 16 or over, ISAs can be used to save a lump sum or regular amounts, up to a certain limit, each tax year. The total amount you can invest in ISAs is currently £20,000 (for the tax year 2021/2022).

A quick overview of the rules

Individual Savings Accounts (ISAs) let you save tax-free.

In the current tax year (2021 to 2022), the maximum you can save into ISAs is £20,000..

You can put money into one of the following types of ISA, as long as you don’t exceed the £20,000 limit

• Cash ISAs (16 or over)
• Stocks and shares ISA or innovative finance ISAs (18 or over)
• Lifetime ISAs (over 18 or under 40)

It is also possible to spread your ISA savings across a mix of each ISA type.

To open an ISA you must be either:

• Resident in the UK
• A servant of the Crown, for example, a diplomat or civil servant working overseas, or their spouse of civil partner should you live outside the UK

An individual savings account is for individual savers, so it’s not possible to hold an ISA in joint names or on behalf of someone else.

If you have children or are the legal guardian to children under 18, you can open a Junior ISA for each child you have.

How do ISAs work?

You can choose to save your annual ISA allowance in cash, stocks and shares or through innovative finance (peer-to-peer lending). Alternatively, you can mix and match and split your allowance between two or all three types of ISA. You can only open one new type of ISA with one provider each year.

For example, if you open a cash ISA with one bank, you can’t open another cash ISA for the same tax year with another bank. Likewise, if you have invested in a stocks and shares ISA with one provider already, you must wait until the new tax year before you can take out another investment ISA.

If you hold ISAs from previous tax years you can transfer your savings to another provider or a different type of ISA without it affecting your ISA allowance for the current tax year.

We work with independent financial advisers who are ISA experts. If you want to find out the best way you could use your annual ISA allowance get in touch for a free, no-obligation chat.

We’ll match you with an expert with access to all the ISA providers in the UK. Taking your circumstances, needs and appetite for risk into account, they will advise you which type of ISA may offer the best results for your long-term financial strategy.

How much can I invest?

The amount you can save into your ISA each tax year is set by the UK government. The ISA allowance for the current tax year is £20,000 for 2021/22.

The £20k limit can be saved into one single type of ISA or split between a cash, stocks and shares or innovative finance ISA. You can hold one of each type of ISA in the same tax year and split your money however you prefer, so long as you don’t exceed the £20,000 maximum allowance.

Understanding the different types

The four types of ISA are:

• Cash ISA: Earn interest free of income tax. To be eligible for one, you must be a UK resident over the age of 16.
• Stocks and Shares ISA: For UK residents aged 18 or over, you can invest your funds in the same way you would make any investment but, inside an ISA wrapper, you gain the advantage of not paying tax on any investment growth or dividends.
• Innovative finance ISA: Peer-to-peer lending within an ISA wrapper, more appropriate for seasoned investors, or those with a strong appetite for risk.
• Lifetime ISAs: For people aged between 18 and 39. These may be suitable for people saving a deposit for their first home or investing for their future retirement as a way to increase their pension savings. You can save up to £4,000 each tax year and the government will add an additional 25% on whatever you save; adding £1 to every £4 you save into a LISA.

Junior ISAs

Junior ISAs can be set up for children by a parent or legal guardian. The child can manage the account themselves when they are 16 but cannot access the funds until they reach 18. You can opt for a Junior ISA cash version where savings will get interest 100% tax-free or a stocks and shares version which allows your investment to grow 100% tax-free.

You can save £9,000 into a junior ISA this tax year (2021/22).

If you’re committed to saving over the medium to long-term, most experts would advise you to invest your money to benefit from maximum returns. Get in touch if you’d like to talk to an independent financial adviser about suitable options for you.

Why use ISAs for saving?

If you are a basic rate taxpayer, your Personal Savings Allowance lets you save £1,000 a year tax-free. If you pay tax at the higher rate of 40%, this sum reduces to £500. ISAs allow you to save up to a maximum of £20,000 tax-free every tax year, regardless of your personal income tax rate.

As well as the substantial sum of money you can save tax-free, inside an ISA the money will also grow tax-free and you will get 100% of the returns. So you pay no capital gains tax (CGT) or dividends tax either.

Investment ISAs are a popular choice when it comes to ISA arrangements due to the way your money can grow, year-on-year, through tax-free compound growth. If you’d like to speak to an ISA expert to find out how you could use investments to make the most of your allowance this tax year, get in touch for a free, no obligation chat.

How many ISA accounts can I have?

You can split your ISA allowance between a combination of ISA accounts, but you must not exceed the £20,000 limit. You can divide your savings with one cash ISA, one investment ISA, one innovative finance ISA and, if you qualify, one lifetime ISA, just make sure you only open one of each type of ISA each tax year.

If you have ISAs from previous tax years, it’s possible to transfer funds into a new ISA. You can choose to do this at any time. Transfers don’t affect your ISA accounts for the current tax year.

To find out which ISA accounts might best suit your circumstances and financial plans, get in touch for a free, no obligation chat and we’ll match you with one of the independent financial advisers we work with.

They will be able to answer all your questions and, as savings and investment experts, will help you decide the ways you could save your money for the greatest potential rewards.

When do ISAs pay interest?

When interest is paid on your ISA depends on the type of account you have. Some cash ISAs will calculate interest daily and pay all the interest on a set monthly date. Other types of account might pay interest annually on the date you opened the account, or a set date decided by the provider.

With some ISAs the provider may offer you a choice of getting your interest on a monthly or annual basis. Occasionally, ISA providers will make it hard to find the information about when interest will be paid. If this is the case, you may need to hunt the information down in the terms and conditions.

Your money will usually start earning interest as soon as it is paid into your account although some providers may wait until your funds have been cleared and officially arrive on your account balance.

Some ISA accounts pay a bonus. When this bonus payment is made will depend on the type of account it is and may be paid alongside the interest.

Cash ISAs occasionally offer an introductory 12 month bonus to attract new customers. The bonus might be paid through an interest increase which would be paid alongside the interest, or at the end of the bonus period on the anniversary of when you first opened the account.

If you have a Lifetime ISA, the government bonus will be paid every month so you can earn tax-free interest on that too.

Do all ISAs pay the same interest?

ISAs pay different rates of interest and it’s worth shopping around to make the most of your tax-free savings. For example, a fixed-rate cash ISA is likely to pay more interest than a flexible cash ISA. And, while a cash ISA is often deemed ‘safer’, the returns on an investment ISA could far exceed returns you might get.

While a cash ISA is often deemed ‘safer’, the returns you could gain from an investment ISA can far outweigh the returns you could get staying in cash. This is especially true when you’re investing over the medium to long-term.

To find out if you should consider investing your tax-free allowance, get in touch and talk to one of the independent financial advisers we work with. Taking all your circumstances into account, they will be able to advise on the type of ISA which might best suit you.

If an investment is a good idea for you, they will help you understand which type of fund would best match your expectations and appetite for risk.

Should I use ISAs when investing?

If you intend to make an investment and haven’t yet used up your allowance for the year, using an ISA to invest is almost always a good idea. The tax-efficient ISA wrapper allows your investment to grow tax-free and earn compound interest year-on-year.

When you’re ready to withdraw your money you can take the whole sum or a portion of your money out and it remains entirely free of income and capital gains tax. Dividends will also be tax-free.

When you’re considering making any kind of investment, almost all financial advisers would recommend you should only do so if you’re happy to tie your money up for for a minimum of three years. This is not to say you can’t access your money, but for the best returns you should invest for the long-term.

To speak to one of the independent financial advisers we work with, make an enquiry for a free, no obligation chat. We’ll connect you with an adviser who is an expert in ISA and investments.

What is a self-select ISA?

A self-select ISA offers investors flexibility, lower charges and a chance to make investment decisions which have the potential to far outstrip the market. Using a self-select ISA wrapper lets you hold a number of funds, spreading your risk and adding diversity.

This kind of ISA wrapper also offers the easy ability to switch your holdings without incurring high costs.

If you opt for a self-select ISA you can choose to invest in individual shares or selection of funds. You can use a self-select ISA to invest in the whole range of investments, including managed funds – unit trusts, open-ended investment companies (OIECs) and investment trusts – as well as equities, gilts and bonds.

ISAs in the UK and Ireland

The ISA rules in Northern Ireland are the same as in the UK. The annual tax-free savings allowance is the same and the way you can split your funds is also identical.

Whether you’re in the UK or Ireland, get in touch to speak to one of the ISA experts we work with and they will answer your questions and advise you of the savings and investment options which might suit you.

Speak to an expert

We work with independent financial advisers who are experts when it comes to ISAs and using ISAs to invest. Get in touch for a free, no-obligation chat and we’ll connect you to someone who can answer all your questions.

Taking all your circumstances and financial needs and goals into account, they will advise you on the kind of ISA which might best suit you.

Call 0808 189 0463 or make an online enquiry to get started