An individual savings account (ISA) is a tax-efficient method of saving in cash or investing in stocks and shares, up to an annual allowance.
You don’t pay tax on any interest you receive on a cash ISA or any gains you make on a stocks and shares ISA.
What types of ISAs are there?
There are two main types of ISA:
- Cash ISA
- Stocks and shares ISA
There are a few more specialist ISAs too - Innovative, Lifetime and Junior ISAs.
What is a cash ISA?
A cash ISA is a savings account where the interest is paid free of income tax.
What is a stocks and shares ISA?
A stocks and shares ISA is a tax-efficient way to invest for the medium to long term of at least five years, ideally longer. An investor has access to a range of investment funds that invest in different asset types such as equities (company shares), fixed-interest securities (corporate and government bonds) or commercial property.
The value of a stocks and shares ISA can fall as well as rise, isn't guaranteed and an investor may get back less than they invest.
How do ISAs work?
Every tax year, which runs from 6 April to 5 April the following year, you’re given an ISA allowance that lets you save or invest money up to a certain amount without paying tax on your returns.
The annual allowance you can pay into an ISA every year is set by HM Revenue and Customs (HMRC). The ISA allowance for this tax year is £20,000.
If your ISA has a flexible ISA feature, this means you can withdraw money from your ISA and put it back in again without it affecting your annual ISA allowance. For example, if you invest £15,000 into an ISA in the current tax year and then need to take out £2,500, you can put that £2,500 back in without it counting towards your ISA allowance – meaning you could still invest a further £5,000 to take you up to your £20,000 allowance.
How much tax do you pay on an ISA?
One of the things that makes an ISA a popular savings option is that it’s tax-efficient. You have no personal liability to tax on any gains you make on your money invested in the ISA.
The favourable tax treatment of ISAs may be subject to change in future. The value of any tax benefits will depend on your individual circumstances.
How many ISAs can you have?
You can have multiple ISAs, however, you can only pay into one of each type of ISA in a single tax year (for example, you could pay into a stocks and shares ISA and a cash ISA in the same tax year - as long as you don’t exceed your annual ISA allowance – currently £20,000).
You can also bring together – or 'consolidate' – your ISAs by transferring them to a single provider.