What is an ISA?

Understanding ISA allowances, account types and more.

An ISA – or Individual Savings Account – is a tax-efficient savings account available to all UK residents. ISAs were introduced in 1999 to replace personal equity plans, and have since been rolled out by banks, building societies and insurers, as well as asset managers and National Savings and Investments.

ISAs offer a range of benefits to savers, but the main appeal is the tax efficiency on offer. With a Cash ISA for example, it is free to open an account and you don't have to pay any tax on interest accrued. This can ultimately provide customers with savings up to 45% on interest, depending on their tax status. Savers are essentially entitled to keep all the interest they make on their account. The value of tax benefits will depend on individual circumstances.

While there are no limits to the number of ISAs you can open, there is a limit to the amount you can put aside in your savings account throughout each tax year. This is known as an ISA allowance. You can save up to £20,000 for the current tax year. The current rules for ISAs are subject to change by HMRC. For further information on this you should contact HMRC.

    The different types of ISA

    There are various types of ISA available to savers, offering different benefits and rates. But broadly speaking, ISAs are divided into three types: Cash ISAs, Stock and Shares ISAs and Innovative Finance ISAs.

      Fixed Rate Cash ISA

      A fixed rate Cash ISA could be a good choice for people who are looking to set aside a large amount of money for a fixed period of time with no withdrawals during this time. In return for saving in this kind of account, customers could benefit from tax-free interest and higher interest rates.

      Another reason for opening a fixed rate Cash ISA is that the interest rate will not change over the term outlined in a customer's agreement, ensuring greater security and returns on investment for the account holder. It is important to be aware however that if you withdraw from a fixed rate Cash ISA before the full term, you won't get the interest rate and may be charged a fee.

        Instant Access Cash ISA

        The flexible Instant Access Cash ISA allows you to withdraw and replace money as often as you'd like from both current and previous years subscriptions, as long as the money is returned to the account before midnight on the 5th April in the same tax year it was withdrawn. We recommend that you do so by 5pm on 5th April to ensure that any funds are in your Account before the cut off deadline at the end of the tax year. As this is a variable interest rate account, the amount of interest you earn is likely to fluctuate.

          Junior ISA

          For parents and guardians, there is the opportunity to open a JISA – a Junior ISA – for your children. This could be a great way to put money aside over a long period of time toward your child's education or somewhere for them to live later in life, helping with financial security for them when they grow up.

          There are two types of Junior ISA:

          • A Junior Cash ISA, where you don't pay tax on interest on the money you save
          • A Stocks and Shares Junior ISA, where the cash is invested and you won't pay tax on capital growth, if any, or dividends you receive

          Your child can have one or both types of Junior ISA.

          The account can be set up as soon as a child is born, and will become available to them when they turn 18 – before this time, no money can be withdrawn from the account, but it can be transferred to another Junior ISA. Children aged 16 and over can also set up their own Junior ISA.

          You can save up to £9,000 for the current tax year. The current rules for JISAs are subject to change by HMRC.

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