Getting started with ISAs

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ISAs are a popular way to save money. But what are they and how do they work? In this article, we’ll tell you what you need to know to get started with an ISA.

What we’ll cover:

  • Different types of ISA and what they’re for
  • How ISAs differ from other savings accounts
  • The rules around opening and paying into ISAs

What is an ISA?

First things first: ISA stands for ‘Individual Savings Account’. The key difference from an ordinary savings account is that putting your money in an ISA means you know the interest you earn is protected from UK income tax.

A good way to think about an ISA is that it works as a tax-free* ‘wrapper’. That money is ‘wrapped’ away, and the interest you earn is protected from being taxed.

There are four different types of ISA. Each works a little differently, but generally speaking:

Cash ISA

Acts like an everyday savings account, except you don’t pay tax on the interest you earn.

Stocks & Shares ISA

A tax-efficient way to invest in stocks and shares, bonds and funds.

Innovative Finance ISA

Tax-efficient peer-to-peer lending or investing in ‘crowdfunding’.

Lifetime ISA (LISA)

Allows you to save or invest up to £4,000 a year until you’re 50, towards your first home or for later life, and receive a 25% government bonus.

How many ISAs can I have?

Every tax year you can put money into one of each kind of ISA.

The tax year runs from 6 April to 5 April. At the end of the tax year, your ISAs will stay open and continue to earn interest. It’s important to remember: although you can have any number of ISAs open at one time, you can only pay into one of each type per year.

So if you already have a cash ISA open with one provider from a previous tax year, you can open a new cash ISA with a different provider, but you can only pay into one of those cash ISAs during the same tax year.

How much can you put in an ISA?

This is another way ISAs are different from other savings accounts: there’s an annual limit on how much you can save in ISAs, known as an ISA allowance. For both the 2021-22 and 2022-23 tax years, the annual ISA allowance is £20,000, but it could change in the future.

This limit applies across all the different types of ISA you may hold, and you can split your allowance across these different types if you want to. Or, you can pay the full £20,000 into a single type of ISA. You can only pay £4,000 into a lifetime ISA in one tax year.

For example: 

You can

Put £20,000 in a cash ISA with one provider.
 

But you can’t

Put £10,000 in a cash ISA with one provider and £10,000 in another provider’s cash ISA during the same tax year.

You can

Pay £5,000 into a cash ISA, £2,000 into a stocks & shares ISA, £4,000 in a LISA and £9,000 in an innovative finance ISA with the same provider, or with different providers.

But you can’t

Pay £2,000 into a stocks & shares ISA with one provider and £18,000 into another provider’s stocks & shares ISA during the same tax year.

Can you make withdrawals from an ISA?

With a lifetime ISA or innovative finance ISA, there may be restrictions on withdrawals. When it comes to cash ISAs and stocks & shares ISAs, withdrawing your money is usually easier.

You can usually take your money out of a cash ISA whenever you like – as long as it’s not a fixed-term account. But there are different rules around putting that money back into your ISA depending on whether the ISA you hold is flexible or not.

If your ISA is a ‘flexible’ one, you can take money in and out without it impacting your annual allowance of £20,000. So you could put in £10,000, withdraw £3,000 and then put a further £13,000 in and the whole £20,000 would still benefit from the tax protection.

If your ISA is ‘not flexible’, any money you take out can’t be replaced within your annual ISA allowance. For example:

  • You save £15,000 in a cash ISA.
  • You withdraw £5,000, leaving your ISA balance at £10,000.
  • Now you can only add another £5,000 into your ISAs this tax year.

This is because the annual ISA allowance applies to what you pay in, not what you save overall.

Remember that the interest on your savings is only exempt from UK income tax while that money remains in an ISA. Once the money has been withdrawn from an ISA, any future interest you earn on that amount may be subject to tax.

It might be worth double checking with your bank whether there are any other penalties for withdrawing money from your particular ISA, just in case.

Do I need an ISA?

ISAs are helpful in protecting your savings from UK income tax. But what if you don’t currently have to pay tax on your savings? If you don’t currently exceed your Personal Savings Allowance – the amount you’re allowed to earn in interest before having to pay tax on the interest – is an ISA still worth it?

By saving in an ISA now, you can protect your savings from future tax – even if you don’t currently have to pay tax on your savings.

Say a salary increase pushes you into a higher tax bracket, or interest rates increase enough for you to exceed your Personal Savings Allowance – your savings could then be subject to tax. There’s also a chance the Personal Savings Allowance could change in future.

Remember that the ISA allowance means you can only pay a limited amount into an ISA per year, so future-proofing your savings in an ISA now might be beneficial later. 

Learn more about maximising your ISA allowance.

Key things to remember

  • ISAs protect the interest you earn on your savings from UK income tax.
  • Your ISA savings interest only remains tax-free* while it’s still ‘wrapped’ in an ISA.
  • The ISA allowance is the annual limit you can save in an ISA, and is currently £20,000.

If this has got you thinking about opening an ISA, learn more about our Cash ISA. 

*Tax-free is the rate payable where interest is exempt from UK income tax. Your savings balance will be eligible for this tax benefit for so long as it is held in a valid cash ISA account.

The tax treatment of ISAs and the applicable Government rules are subject to change. The benefits of your account for tax purposes will depend on your personal financial circumstances.

The content in this article is for information only and is not advice. All content in this article was accurate on the date of publication shown above.

The content in this article is for information only and is not advice. All content in this article was accurate on the date of publication shown above.