coins falling out of a jar with the caption ISA

ISAs have never been more varied, incentivised and generous. As a result, the world of ISAs is more complex and confusing than ever before. But it doesn’t need to be. This clear, simple and comprehensive guide will put you amongst those that know how to harness their tax-efficient power and propel you towards your financial goals.

Before we kick-off, if you just want to know about a specific type of ISA, the list below will take you directly to the relevant page, pronto.

What is an ISA?

Want the ISA headlines at a glance? Here are you top ISA need-to-knows:

  • ISA = Individual Savings Account
  • Tax-free savings
  • Put in up to £20,000 per tax year across all of your ISA types
  • Six types of ISA
  • You can pay into different types of ISA in a single tax year
  • You cannot pay into more than one ISA of the same type in a single tax year
  • Only open one ISA per type per year

How does an ISA work?

An ISA is an individual savings account that is tax-free.

It’s not the kind of regular saving account you can keep dipping in and out of, but something more for the medium to long term.

Think of an ISA as a chest of draws. Any money you put inside that chest is tax-free. That means that you do not pay tax on any interest or earnings those savings make. Nice and easy for both you and the tax man, as earnings don’t need to be declared.

As your savings grow over time, this tax-free advantage compounds and becomes incredibly powerful, which is what makes them so attractive.

How many types of ISA are there in the UK?

There are six types of ISA. Each has its own special set of advantages, restrictions and rules. We’ll come on these later and why you would pick one over the other.

Take that chest we conjured up earlier. Now imagine it has six drawers. Each drawer represents one of the six different types of ISA.

Five are allocated to you as an adult, one is allocated to your child/children (the Junior ISA).

Many people have a single ISA that is most relevant to their needs. Some have several for different purposes. Very few open all six. It’s a question of working out which are the most appropriate and beneficial to you.

Drawing of a chest of drawers representing the types of ISAs in the UK
There are different types of ISAs which are all tax free. You can put in a total of £20,000 per tax year across all of your ISAs.

How much can I pay into an ISA?

Check out the picture above.

It shows that you can pay in a total of £20,000 per year across all of your ISA types.

For example, if you put £10,000 into your Cash ISA drawer, then you have £10,000 left to either keep putting in that Cash ISA or any one or combination of the other ISAs drawers you have open.

To clarify, if you put £20,000 into that Cash ISA, then you would not be able to pay into any other ISA until the next tax year (6th of April).

Once you’ve put in a total of £20,000, that chest of drawers is now full until next year.

Remember, you don’t have to put in the full £20,000, that’s just the upper limit. You can put in as little as you want.

What is the ISA allowance?

This is where it can get a little tricky, but hang in there.

It is true that you can only pay in a total of £20,000 per tax year across all of your ISAs (excluding the Junior ISA).

But some type of ISA also have their own set limits.

For example, you can only pay a maximum of £4,000 into a Lifetime ISA (LISA). The good news, however, is that you still have £16,000 left to put into other types you have open.

ISA Allowance table for 2019/20 tax year

What is the ISA allowance for 2019/20?

The original Cash ISAs were introduced in 1999/2000 and started with an original allowance of just £7,000.

Since then, new types of ISA have been introduced and the allowance has steadily increased. 2016 in particular, a time of very low-interest rates, saw a big shake-up including a 30% increase to the allowance.

In 2017/18 the allowance rose further still to £20,000 and has stayed at that level since.

The allowance for 2019/20 remains at £20,000.

There are specific limits for certain types of ISAs and some of these did change in tax year 2019/20. Check the table above.

Does a Junior ISA count towards my ISA allowance?

A Junior ISA actually comes out of your child(s) tax allowance, not your personal £20,000.

And in case you’re wondering: yes. Children are subject to paying taxes and have tax allowances just like the rest of us! It’s a crazy world we live in, what with millionaire YouTube vloggers earning fortunes.

Thinking about saving for your children? here are your options

What happens if I don’t use my allowance?

Once the tax year is over, it’s gone.

You cannot roll-over any remaining allowance in to a new tax year.

How old do I have to be to open an ISA?

There are certain restrictions to be aware of:

Cash ISAOver 16
Stocks and Shares / Innovative Finance ISAOver 18
Lifetime ISA18 to 39
Junior ISAUnder 16

Can I pay into two ISAs?

This one really confused me when I started looking into ISAs. The last thing I wanted was an ominous knock on the door from Mr Tax Man in 10 years’ time and scupper my financial freedom plans because I hadn’t understood this properly.

  • You can only pay into one type of ISA each tax year.
  • You can pay in to multiple ISAs if they are of a different type.

For example, you can only pay into one Cash ISA per tax year. But you can pay into both a Cash ISA and a Stocks and Shares ISA in that same year.

  • You can have two or more types of ISA open, but you can only pay into one of them per tax year.
  • And you can only open one of each ISA type per tax year.

Example: I could open a Stocks & Shares ISA and a LISA in the same tax year and pay into both. However, I could NOT open another Stocks & Shares ISA in the same year.

Is an ISA better than a savings account?

Back in the day, all savings were taxed. Therefore an ISA, being tax-free an’ all, made total sense.

Then in April 2016, to encourage people to save, the Personal Savings Allowance (PSA) was introduced. This allowed basic-rate taxpayers to earn up to £1,000 from their savings (£500 for higher-rate payers and a big fat £0 for additional-rate payers), before being taxed.

This meant that 95% of people no longer had to pay tax on their savings and it kind of undermined the Cash ISA market with its fairly paltry interest rates.

That said, if you have reasonable sums saved, then a Cash ISA can still prove a useful tax-haven, particularly if you see this as a long term saving strategy.

And if you want to explore ways to potentially grow your savings and the amount they can earn further, then check out a Stocks and Shares ISA, as these typically outperform Cash ISAs in the long run.

What is a flexible ISA?

ISAs are not really considered the type of savings account which you can dip in and out of. But life can be a cruel mistress and there may be times we need to access the funds sat in our ISA.

A Flexible ISA isn’t actually yet another type of ISA.

Instead, it is a mechanism which some providers include that allows you to withdraw money from your ISA, then replace it, without affecting your annual ISA limit of £20,000.

For example, if you had maxed out £20,000 into an ISA that wasn’t Flexible and had to withdraw £2,000 for car repairs, you couldn’t then put that £2,000 back in during that same tax year. This is because you had already put in the maximum £20,000.

However, had you done this with an ISA that is Flexible, then it would allow you to put that £2,000 back in.

Not all providers enable Flexibility in their ISAs, do check this beforehand.

To prevent dipping into ISA savings or investments, consider having an Emergency Fund. Check this out: Emergency Savings – How Much Should You Have?

What are the best ISAs to invest in?

This is a commonly asked question, but in some ways is misleading.

The original Cash ISA can best be thought of like a savings account, on which you get an interest rate.

The advantage an ISA gives you over a normal savings account is that the interest you make is tax-free. So as such, you’re not really investing in anything.

The same is true of a Lifetime Cash ISA or a Junior Cash ISA.

However, you can invest inside a Stocks and Shares ISA, as the name suggests. The ISA simply acts as a tax-free wrapper. Once the money is in your Stocks and Shares ISA, you can invest in what you like and there are literally thousands of options to choose from, which is a whole other rabbit hole.

Take a look at the specific Stocks and Shares ISA page to know more.

Can I transfer an ISA?

Opening a new ISA and transferring is generally a straight forward process, but there are important things to consider:

  • You can transfer an ISA between providers
  • Make as many transfers as you like
  • Transfers don’t count as ‘paying in’ (ie, towards your £20,000 annual limit if they are from previous tax years)
  • Check your provider accepts transfers – not all do
  • Also, check any transferring out penalties from the outgoing provider
  • You can transfer the current year’s value and/or all or part of previous years – there is no cap on the amount transferred
  • Cash ISAs can be transferred to Stocks and Shares ISA and vice versa

What’s really important, however, is that when you transfer you do not close the account. Doing so means the loss of the tax-free advantages, you can’t put in more than £20,000 to the new ISA and it’s also time out of the market for those of you in Stocks and Shares ISAs.

Make you sure you transfer the account when applying and check the new provider accepts transfers.

Which ISA is right for me?

Now we know the ISA fundamentals and their power, let’s explore the different types of ISA in more detail.

But first, it’s useful to get an idea of which one(s) is right for you and your circumstances.

Flowchart showing which is the best ISA to invest in

Look at the flow chart above and think about the following questions to get an idea.

  • How long do I want the savings for? If you plan on accessing the funds in less than five years, then generally speaking a Cash ISA or Lifetime Cash ISA is a good option for you. If you’re taking a more long term view, then a Stocks and Shares ISA is worth considering and could yield better results.
  • What is the money for?
    • If you’re saving for a house and are a first-time buyer, then look at the Lifetime ISA and/or Help to Buy ISA.
    • If the money is for a child, then the Junior ISA has some attractive benefits.
    • Retirement? Whilst the Lifetime ISA has a Pension element to it, it’s first worth reviewing your contributions to a Work Based Pension or perhaps consider a SIPP (Self Invested Private Pension), as they are usually more tax efficient for most people.

If you are weighing up the options of investing in your pension or a LISA then check out this article.

What next?

Now you have an idea of which type of ISA may be right for you, click on the relevant links to learn about the specific considerations and how to leverage it to the full potential.

The tax-saving aspect of ISAs has made them increasingly popular, particularly when combined with the different types on offer. As your fund grows over time, the tax savings can be very powerful. If you don’t need a savings account that you can regularly dip into, but rather something you can ‘set-and-forget’ for at least a few years, then some form of ISA is definitely worth considering.

EatSleepMoney.co.uk does not offer financial advice and is intended for reference/information only. Remember, you should always carry out your own research and/or take specific professional advice before choosing any financial products or services or undertaking any business or financial venture. Investments may go up as well as down and you may get back less than you put in.

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ISAs – your ultimate GUIDE to powerful tax-free savings
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