The Complete Guide to ISAs in the UK

An ISA (Individual Savings Account) is a type of savings account that allows investors in the U.K. to save or invest money, tax-free. There are several types of ISAs with cash or investment options.

Around 12 million ISAs are currently held by Britons, government figures show, making ISAs a popular way to save in the U.K. The total value across these accounts is £742 billion and around £67 billion is paid into adult ISAs each year. Around 7.1 million of those accounts are cash ISAs and 4 million are investment ISAs.

ISAs were launched in 1999 to encourage people to save or invest free from income tax, capital gains tax, or dividend tax. They are offered by a wide range of savings providers in the U.K., including banks, building societies, National Savings and Investments (NS&I), and investment platforms.

You can pay up to £20,000 per adult each tax year into ISAs, across several accounts or one account. Money can usually be taken out at any time – unless you have a fixed-rate cash ISA.

Here's a breakdown of the types of ISAs available to U.K. investors:

• Cash ISAs. These pay a fixed or variable interest rate.
• Investment ISAs. Here, the return on your money depends on the performance of your investments.
• Lifetime ISA. This type of ISA is for those looking to save for their first home or retirement. In addition to cash interest or investment growth, savers are given an annual bonus of up to £1,000 a year.
• Help to Buy ISA. Designed to help people buy their first home, Help to Buy ISAs are no longer available to open but existing accounts can be paid into until 2029. They have been replaced by the Lifetime ISA.
• Innovative Finance ISA (IFISA). Through an IFISA, you loan money to businesses and are repaid with interest. An IFISA is generally seen as high-risk.
• Junior ISA. Available to children below age 18, a junior ISA allows you to save for your child without having to pay tax on interest or growth.
• British ISA. There are plans for a ‘British ISA’ to be introduced in late 2024 or 2025. This carries an additional £5,000 allowance if you invest in UK-listed companies.

You may also have come across the term “AIM ISA”. This is a stocks and shares ISA that invests in higher-risk companies listed on London’s Alternative Investment Market (AIM). Investments in AIM-listed companies may be free of inheritance tax if the firms qualify for business relief and the investment has been held for at least two years and at the time of death.

If you are able to save money each month, it could be a good idea to prioritise paying these savings into an ISA before other types of savings accounts. ISAs offer U.K. investors and savers a tax-free savings account and a variety of ways to save on taxes.

Income tax savings

The money in your ISA is not subject to income tax.

Savings held in ordinary savings accounts may be subject to income tax. Basic-rate taxpayers can earn £1,000 in interest tax-free each year before paying tax through the Personal Savings Allowance. For higher-rate taxpayers (earning above £50,270), the Personal Savings Allowance drops to £500 a year and additional-rate taxpayers (earning above £125,140) get no savings allowance.

Capital gains and dividend tax savings

The money held in an ISA is not subject to capital gains tax or dividend tax. This means you won’t have to worry about paying tax on interest or the growth of your investments.

Retirement savings

Individual savings accounts also offer a way to save for future retirement income. ISAs are popular among followers of the FIRE (Financial Independence Retire Early) movement in the U.K.

You can withdraw money from ISAs at any age, unlike private pensions which can’t be accessed until age 55 (rising to 57 in 2028). Those who retire at age 50, for example, will often rely on income from their ISAs to fund their living costs until their private pension kicks in, in their mid-fifties. The state pension doesn’t come in until age 66 (rising to 67 by 2028).

As mentioned above, income from ISAs is tax-free. So you could pay yourself an income of £20,000 a year from your ISA, and you won’t pay any income tax or national insurance.

You can pay up to £20,000 a year across all adult ISA accounts. This annual ISA allowance has remained frozen since 2017. There is no lifetime limit on the amount that can be saved in an ISA (beyond the annual subscription limit) or on the amount of income that can be earned tax-free.

The Lifetime ISA annual allowance is £4,000 a year. This counts towards your overall ISA allowance. So if you decide to put £4,000 into a Lifetime ISA, you can pay a maximum of £16,000 into other ISAs.

The Junior ISA annual allowance is £9,000 a year. This is separate from the adult ISA allowance. This means you could pay £9,000 into a Junior ISA and still pay £20,000 into your own ISA (or ISAs).

You should not pay any fees for a cash ISA. However, you may face penalties if you request to withdraw your money early from a fixed-rate ISA. This normally means you forfeit some interest.

You will likely pay fees for an investment ISA, as investing costs money. How much you pay will depend on the provider you choose and the investments you hold. Some, such as Freetrade and Interactive Investor, charge a flat monthly fee. Trading 212 offers a free investment ISA.

Other platforms, such as Hargreaves Lansdown or AJ Bell charge percentage fees for managing your account and may also charge trading fees.

The best ISA provider for your needs will depend on what you’re saving for. If you think you may need instant access to the money in your ISA account, an easy-access cash ISA may be the right choice for you. If you’re willing to tie your money up for one, two, or five years, a fixed-rate cash ISA may be more appropriate. By choosing a fixed-rate cash ISA, you can lock in a set interest rate that is typically higher than an easy-access cash ISA.

If you’re saving for the long-term – say, five years plus – a stocks-and-shares or investment ISA may be a more appropriate choice. Data consistently show that savings invested in the stock market outperform cash savings over the long term.

It’s easy to set up an ISA account. Perhaps the hardest part is choosing an ISA in the first place.

Search online comparison websites to see which provider is most suitable for you. Then go to the website of the ISA provider and apply to open one online. They are typically very quick to open and you can start paying in soon after opening.

Both ISAs and SIPPs are tax-efficient ways to save for retirement; each option has its own unique advantages for U.K. investors.

Financial advisers typically recommend that investors and savers prioritise SIPPs over ISAs for retirement savings, as the tax benefits are more generous. With SIPPs, you get tax relief on contributions when you pay in. With ISAs, on the other hand, contributions come out of your post-tax income.

Investments in a SIPP can also grow tax-free, like with ISAs. When you withdraw money from your SIPP, the first 25% of withdrawals are tax-free. The remainder may be subject to income tax, depending on your annual income.

You can also pay more into a SIPP each year. You can pay up to £60,000 into a SIPP annually, although you can’t pay in more than you earn. So if you have an annual salary of £50,000, you could pay in up to £50,000 per year. In comparison, the ISA annual allowance is £20,000.

The big downside of a SIPP is that it may be several years before you can withdraw the money. SIPPs can be accessed from age 55 (rising to 57 in 2028). If you are several years from this age and think you’d need access to your money before then, an ISA may be more appropriate as there are no age restrictions.