Individual savings accounts (ISAs) are tax-free, so they should be your first port of call if you are looking to build up a savings pot.
This tax year (2018/19) and the next (2019/20), you can put up to £20,000 into an ISA. You can invest it in cash, shares or a mixture of both – it’s entirely up to you.
It’s worth keeping in mind that once the tax year changes, the pot starts again – so you can’t use a previous year’s ISA allowance. It’s also best to invest at the start of the year so you’ll benefit from a full year’s interest. For an ISA paying 1.5%, that’s £300 if you invest the full £20,000.
Can I open more than one ISA per year?
You can only open one cash ISA every year, but you can open both a cash ISA and a stocks & shares ISA, so long as you invest no more than £20,000 in total. You can have both ISAs with the same provider, or with different companies.
What happens if I take money out of my ISA?
You can take money out of your ISA at any time, but it may affect your annual allowance – you may even be charged a fee. If you’ve invested the full amount in your Cash ISA, for example, and withdraw £2,000, you’ll have to wait until the next tax year to reinvest it.
With instant, or easy-access ISAs you can withdraw money whenever you like. Fixed-term ISAs will charge you a fee for accessing before the deal expires – usually between 60 and 120 days’ interest.
Some ISAs are flexible, which means you can take out cash then put it back without reducing your current year’s allowance.
What are the different kinds of ISA?
Cash ISAs work in the same way as standard savings accounts, except the interest you earn is tax-free.
If you choose a variable rate account, then the interest you earn can change over time. Many variable rate ISAs include an introductory bonus interest rate, which usually disappears after the first year. If you find your interest rate suddenly falls, you should consider transferring your savings into a new ISA that pays a higher interest rate.
With a fixed-rate cash ISA, the interest rate won’t change during the term of the account, and you can often earn more than you would with an easy-access ISA.
However, fixed-rate ISAs don’t usually allow withdrawals, so you’ll need to be sure you can afford to lock away your savings for at least a year. As a general rule, the longer you’re prepared to leave your money untouched, the higher the rate of interest you will earn.
Alternatively, if you have a bigger appetite for risk you might want to consider investing in a stocks and shares ISA. Bear in mind that stocks fall as well as rise, so you could end up getting back less than you put in. Historically, stocks and shares tend to outperform cash accounts if you invest over a long-term period.
There are numerous different investment funds to choose from. If you aren’t certain which funds to pick, you can pay an Independent Financial Adviser (IFA) to help you. It's usually a good idea to pick a variety of investment funds to help spread the risk.
Other types of ISA include Help to Buy ISAs, which have a savings allowance of £200 per month, and Junior ISAs.
Junior ISAs (JISAs) work in a similar way to adult accounts, except they’re specifically for the under 18s – meaning mums and dads can save on their children's behalf, tax-free.
Parents can choose from stocks and shares JISAs, where your money is invested in the stock market, and cash JISAs, which is a tax-free savings account. This tax year you can pay up to £4,260 into a Junior ISA. This will increase to £4,368 in the 2019-20 tax year.
Remember that the account will be held in your child’s name, so only they can get their hands on the money. They won’t be able to do this until they turn 18, although they can manage the account themselves once they reach 16.
Finding the best deal
If you're still wondering where to invest your ISA allowance, MoneySuperMarket compares hundreds of different deals in just a few moments.
Remember, in addition to ISAs all basic rate taxpayers can now earn £1,000 of savings interest a year tax-free thanks to the Personal Savings Allowance (PSA). You’re a basic rate taxpayer in the 2018/19 tax year if your income is less than £45,350.
If you’re a higher rate taxpayer, paying tax at the 40% rate on an income between £45,351 and £150,000, you’re entitled to a lower PSA of £500 a year.
If you’re an additional taxpayer earning £150,001 or more, you won’t get an allowance.