How do ISAs work?

What is an ISA?

ISA stands for an individual savings account and can be used to earn money tax-free (both income and capital gains). Each year investors are allowed to invest up to £20,000 in different ISAs.

Who can open an ISA?

Any UK resident can open an ISA as long as they’re old enough. The minimum age depends on what type of ISA is opened, Stocks & shares and innovative finance ISAs require a minimum age of 18, while cash ISAs only require an age of 16. Lifetime ISAs must be opened between the ages of 18 and 40.

Different types of ISAs available

Stocks & shares ISA – Used to buy funds (pooled investments), bonds or individual stocks in a way that is free from all tax.

Lifetime ISA (LISA) – Used to buy your first home or as a retired pot. The government will top up your contributions by 25% on a maximum of £4,000 per year. If you decide to use your LISA for any other reason then you will be penalised 25% of your money. This will make you have less money than you started with. (If you contributed the maximum of £4,000 + government top-up of £1,000 = £5,000 x 25% = £3,750 so you’ve lost £250 of your initial capital)

Innovative Finance ISA – Tax wrapper to savings income in qualifying investments: peer-to-peer lending, crowdfunding debentures and cash.

Cash ISA – Used to grow your savings while earning tax-free interest.

There are also junior ISAs available which can be set up for your children, the maximum you can pay into these is £9,000 annually.