A guide to ISAs

It’s probably fair to say that we’re all aware of ISAs, but how much do you know about all the different types of ISA and how they work? Let’s find out with this helpful guide put together by our expert team at PIL Southampton.

First, let’s answer the questions we’re most commonly asked about ISAs, before going on to explain the various types of ISA that are available.

What is an ISA and what does ISA stand for? 

ISA stands for Individual Savings Account. Often referred to as ‘tax-free savings wrappers’, they give you the opportunity to save money tax efficiently. You do this by saving or investing up to a set amount, known as your ‘ISA allowance’ each tax year. You don’t have to pay tax on the income, capital gains or interest paid on your ISA.

How do ISAs work?

You receive a new ISA allowance each tax year. 

Any money your ISA makes is tax free. Depending on the type of ISA/s you have, this could be interest, income or gains in the stock market.

Your ISA allowance works on a ‘use it or lose it’ basis. You can invest up to the maximum allowance in any one tax year, but you can’t roll over any unused amount into the following tax year. 

How much money can you put into an ISA?

In the UK, for the 2024-2025 tax year, £20,000 is the maximum amount you can pay into one ISA, or you can split it across several ISAs. This amount didn’t change from the previous year. 

How many ISAs can you have? 

Before the 2024/2025 tax year, you could only take out one of each type of ISA, for example you could put £15,000 of your ISA allowance into a cash ISA and £5,000 into a stocks and shares ISA.

Each year, you could allocate your new allowance to those existing ISAs.

However, now, you can open multiple ISAs of the same type (except for the Lifetime ISA) within the same tax year, as long as you don’t exceed the annual £20,000 subscription limit.

What are the rules for ISAs? 

You can’t exceed the maximum tax year allowance, which is currently £20,000 for the 2024/2025 tax year. This renews and resets each year, on 6th April. As we previously mentioned, you can’t rollover any unused ISA allowance from one tax year into the following tax year.

You can move your money between your various ISAs, which is useful if you want to transfer your previous years’ ISA allowance to a more recently opened ISA with a better interest rate. Be mindful of potential penalties though.

Note: If you do choose to move your money from one ISA to another, don’t withdraw the money yourself. Complete a transfer request form and let either the new or existing provider take care of the process for you, otherwise the tax benefits will be lost.

Your ISA allowance is separate to, and unaffected by, the Personal Savings Allowance (PSA), which allows basic rate taxpayers to earn £1,000 annually tax free, and for higher rate taxpayers to earn £500 per year. As additional rate taxpayers don’t get a PSA, cash ISAs are even more beneficial to them.

What are the different types of ISA? 

There are several different types of ISA. Your financial adviser at PIL Southampton will be happy to talk through your options to help you decide which could be best suited to you.

Cash ISAs 

Generally the most popular form of ISA, the cash ISA works just like an everyday savings account; the key difference is that you don’t pay tax on any interest you earn from the account. Those born after 5th April 2008 can’t take out a cash ISA until they are 18. Previously, the minimum age was 16. 

You can open either a fixed rate or a variable rate cash ISA. 

Fixed rate cash ISAs usually have a slightly higher interest rate, as you can’t withdraw the savings before the end of the fixed term without incurring a penalty.

Variable rates provide ‘easy’/’instant access’ giving you the flexibility of withdrawing your money whenever you like but the rates of interest can fluctuate.

Note: Watch out for attractive introductory interest rates that may not be so attractive after the introductory period ends.

Stocks and Shares ISAs 

This investment account is designed as a medium- to long-term investment, which generally means at least five years. Your money is invested in a range of funds, shares, bonds and investment trusts. The value of your investment will fluctuate and there is no guarantee that you will get back what you put in. You have to be at least 18 to open this type of ISA.

Innovative Finance ISAs 

Instead of cash or stocks and shares, this type of ISA contains peer-to-peer loans, matching investors with borrowers. You could also invest in a business buy buying its debt, known as ‘crowdfunding debentures’.

Lifetime ISAs 

A Lifetime ISA is designed specifically to help people to save for a deposit to help to purchase their first home, or to save for their retirement. Anyone aged 18 to 39 can take out a Lifetime ISA, and you can pay into it up to your 50th birthday. The government will give you a bonus of 25% on the whole amount you pay into it in each tax year. You can’t use your whole £20,000 ISA allowance though, you can only pay in a maximum of £4,000 per year.

If you need to withdraw the money you’ve saved for any other reason than to buy a first home, or before you turn 60 to help towards your retirement, you will lose the 25% government bonus.

Junior ISA

Someone with parental responsibility for a child can set up a tax-efficient savings account in their name. The annual savings limit is lower than an adult’s – currently £9,000 for the 2024/2025 tax year, but the interest rates offered are usually higher than those for adult ISAs.

There are two types of Junior ISA; a cash Junior ISA and a Stocks and Shares Junior ISA. A child can have both running at the same time and they’re both tax free.

The child can’t access these funds until they turn 18, at which time the Junior ISA automatically switches to an adult ISA, when they can choose to withdraw the money or continue to save it.

How PIL Southampton can help you 

Our experienced team of investment advisers is here to help you to navigate the world of ISAs and find the most suitable options that should best suit your needs and your personal circumstances. 

How you can contact PIL Southampton

You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.