Every taxpayer pays interest on their savings, above the limit of their Personal Savings Allowance (PSA). But to encourage saving, Individual Savings Accounts (ISAs) are accounts you never pay tax on.
They’re offered by banks, building societies, asset managers and the government-backed National Savings & Investments (NS&I).
The interest you earn doesn’t count towards your Personal Savings Allowance, so if you could be earning a lot of interest, you can protect more of it in an ISA.
An administrative bonus: PAYE taxpayers still don’t have to fill out an annual tax return for their ISAs.
ISA benefits
ISA earnings can range from 0.65% on an instant-access cash ISA that can be opened with just a £1 deposit, to 8% in a “structured deposit plan” cash ISA or up to 14.51% on a “structured investment plan” stocks and shares ISA.
Accumulating those earnings tax-free is a considerable benefit, so there’s a limit to how much you can save or invest in a tax-free ISA “wrapper” each year: from the 2017/18 tax year the limit has been £20,000 a year.
You must save or invest before the end of each tax year on 5 April to get the tax-free benefit. And you can’t roll over any unused allowance to the following year.
So if you only put £12,000 into an ISA (or more than one type of ISA) in one year, the following year you can still only save or invest a maximum of £20,000 into ISAs – not £28,000.
Transfer to maximise earnings
If you want to transfer the balance out of an old ISA account into a higher-paying account, it won’t be counted as part of your current year’s ISA allowance.
Be sure to transfer the balance: don’t withdraw it in cash and then pay it in or you’ll be taking it out of its ISA wrapper and it will be counted as part of your annual £20,000 allowance (unless you have a “flexible” ISA). Instruct your new provider to transfer it over.
Compare Selected Income and Growth Funds for your ISA
See below for selected investment funds from other leading fund groups that could provide income and growth for your ISA:
There are five types of ISAs:
Stocks and Shares ISAs
Making your investments within an ISA “wrapper” has tax advantages:
Invest in a Stocks and Shares ISA
Junior ISAs
The maximum contribution limit (2024/25) is £9,000.
The money is tax-free until they turn 18: they can then withdraw it or transfer it to an adult ISA.
Cash ISAs and Help to Buy ISAs
You must be 16 or over to open a Cash ISA.
Cash ISAs can be Instant Access, Regular Savings or Fixed-Rate.
Some of the rates on old Cash ISAs don’t compare well with the current best buys so you’d be advised to check the rates and transfer your balance to a new account with a higher rate. But be sure to get your new provider to do the transfer to keep it ISA-compliant.
Innovative Finance ISAs
Innovative Finance ISAs can be riskier than Cash ISAs, but give you a chance to do peer-to-peer lending, lending to businesses and crowdfunding within a tax-free ISA wrapper.
Invest in an Innovative Finance ISA
Lifetime ISAs
You can save up to £4,000 a year in a LISA and the government will add 25% on top.
The bonus is paid once you reach the age of 50, and is paid monthly, and you’re paid interest on it.
What is an investment ISA?
How do I choose an investment ISA?
Before you open an investment ISA, make sure that:
- Your debts are under control – you’ve either paid them off or have affordable arrangements in place to do so.
- You have emergency savings that you can access easily if something unexpected occurs – if your car breaks down or you’re made redundant, you’ll need savings that you can use straight away.
If you’re very new to saving and don’t yet have a basic emergency fund, you may find that a cash ISA is more suitable for you at this stage. Once you’ve built up some accessible savings in this way, you might then want to consider an investment ISA.
Investment ISA tips for 2024
- You should be prepared to invest for the medium to long term with a investment ISA – for example, for five years or more.
- If you think you might require access to your cash in the next couple of years, a investment ISA may not be the right choice for you. Share prices can be volatile – and so if you were to withdraw your investment in the next twelve to eighteen months, you could end up with less money than you started with.
- Different investment ISAs have different investment options. These range from as little as £10 per month (e.g. through a fund) to a specified minimum investment (e.g. £500).
- Some ISA providers will give you online access to your account, allowing you to see the investment performance of your ISA and keep up to date with any charges incurred.
- If your investment ISA isn’t performing as well as you’d like, you will usually be permitted to transfer it another provider. To do this, speak to your new ISA manager who will arrange the transfer, allowing you to avoid losing any tax benefits by withdrawing your cash.
- You can transfer shares you get from an HMRC-approved SAYE (save as you earn) scheme run by your employer, or a share incentive plan, into a investment component of an ISA without incurring capital gains tax, up to your annual ISA allowance.
- You will not be able to transfer any existing non-ISA shares, or shares you’ve inherited, into an investment ISA.
- With an investment ISA, there is greater long-term growth potential than a cash ISA – however, bear in mind that the value of your investment can go down as well as up.
- If you have an investment ISA from a previous tax year, you’re permitted to move this into a current investment ISA or split it between more than one investment ISA.
- If you want to open a Junior ISA (JISA) for your child, you can also invest in investment on their behalf up to a maximum of £9,000.
How does a stocks and shares ISA work?
Your personal allowance for a stocks and shares ISA is £20,000 for the 2024/25 tax year. Investing this amount would use up your full ISA allowance, but if you prefer, you can divide your ISA allowance between a cash ISA and a stocks and shares ISA.
You could, for example, put some of your allowance in a cash ISA and the remaining balance can be invested in stocks and shares.
When considering a stocks and shares ISA, bear in mind that tax treatment may vary and is subject to change in the future.
Can I transfer a stocks and shares ISA to a new provider?
To transfer a stocks and shares ISA from one provider to another, speak to the new provider, who will arrange it on your behalf.
What do I need to bear in mind when choosing a stocks and shares ISA?
If you want the opportunity to spread your investments around different areas – and thus avoid putting all your eggs in one basket – you could choose a stocks and shares ISA provider that specializes in diverse portfolio management.
One of the key advantages of a stocks and shares ISA is that it can offer the potential to deliver higher returns than a cash ISA, especially if you plan to hold it over the long term.
Holding a stocks and shares ISA for a longer period of time increases your chances of riding out fluctuations in the market.
If you’re looking to hold your investment for at least five years, and are happy to take on a level of risk, then a stocks and shares ISA might be a suitable choice for you.
However, stocks and shares ISAs don’t provide the same level of security as cash ISAs. If you’re saving for the short term, need easy access to your money, can’t afford to risk your capital, or are simply risk-averse, then a stocks and shares ISA probably won’t be suitable for you.
As with all financial decisions, it’s best to seek independent advice if you’re unsure.
If a stocks and shares ISA isn’t the right choice for you, we also provide access to a leading range of cash ISAs.