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What is an Isa?

ISAs Explained

Victoria Russell
Written by  Victoria Russell
5 min read
Updated: 12 Apr 2024

Unsure what an ISA is and how they work? Our guide outlines the different types of ISA and explains the key things you need to know

Introduction to ISAs

When it comes to saving money, the UK offers a unique opportunity through Individual Savings Accounts (ISAs). These accounts are not just any ordinary savings platforms; they come with a delightful tax-free status on interest earnings.

There are two main types of ISA, a cash ISA or a stocks and shares ISA, each catering to different financial needs and risk appetites. A cash ISA is akin to a regular savings account, providing a secure place for your money to grow interest-free.

On the other hand, a stocks and shares ISA offers a potentially higher return by investing in various assets, though this comes with the risk of value fluctuation.

The cherry on top? The UK government allows for tax-free savings up to £20,000 per tax year.

How ISAs work

ISAs stand out from the crowd by offering tax-free benefits that are not available with standard savings accounts. You can open an ISA with a plethora of UK providers, including banks and investment firms.

The tax year, starting on April 6, is your window to save or invest up to £20,000, which can be distributed across different types of ISAs.

What's more, as of the 2024-25 you're now free to open as many stocks and shares ISAs, cash ISAs or innovative finance ISAs as you like over the course of the tax year, provided you stay within the £20,000 annual subscription limit.

While cash ISAs accumulate interest without the taxman's cut, stocks and shares ISAs might come with fees and the inherent risks of investing.

If you're looking to switch things up, you can transfer existing ISAs to new accounts and still keep the tax-free benefits intact.

Man and woman chatting

Different types of ISA accounts

Cash ISA

  • A haven for your savings with a tax-free umbrella for up to £20,000 each year

  • Choose between fixed-rate or instant access options

  • Open to anyone aged 18 or older

  • The main draw: security and tax-free interest

Stocks and shares ISA

  • A tax-efficient investment account

  • Save or invest up to £20,000 tax-free annually

  • Your money plays the stock market game

  • May include annual fees

  • Available from age 18

  • The main draw: the potential for higher returns, albeit with investment risks

Lifetime ISA

  • Tailored for saving towards your first home or retirement

  • Save up to £4,000 a year with a 25% government bonus

  • For individuals aged 18 to 39

  • The main draw: government bonus for significant life events, with penalties for non-qualifying withdrawals

Junior ISA

  • A nest egg for those under 18

  • Save up to £9,000 a year tax-free

  • Can be in cash or stocks and shares form

  • Parents take the helm, but the child reaps the rewards at 18

  • The main draw: tax-free growth and instilling a savings culture in children

Eligibility for ISAs

To dive into the world of ISAs, you must be a UK resident. And you need to be 18 or over to open a cash ISA or stocks and shares ISA, too.

You must also be 18 or over to open a Lifetime ISA, with eligibility capped at 39.

For the youngsters, Junior ISAs are an option, provided they're under 18 and have a parent or guardian to set it up.

ISA allowance as of April 2024

Each person over 18 gets an ISA allowance of £20,000 per tax year. It's important not to confuse this with the personal savings allowance or PSA, as this is entirely separate.

The PSA is a government-set threshold for tax-free interest earnings outside of ISAs, with limits based on your tax rate. Crucially, interest earned in an ISA doesn't eat into your PSA.

Number of ISAs allowed as of April 2024

As of April 2024, the ISA rules have changed. You can now open as many new stocks and shares ISAs, cash ISAs or innovative finance ISAs as you like in any tax year, as long as you stay within the £20,000 annual subscription limit.

Transferring ISAs can be a strategic move and doesn't affect your annual limit.

ISA rules as April 2024 at a glance

  • Save or invest up to £20,000 tax-free each year across multiple ISAs

  • You can now open as many stocks and shares ISAs, cash ISAs or innovative finance ISAs as you like during the tax year

  • Transfer existing ISAs to keep the tax-free status

  • ISA savings are not part of your personal savings allowance

  • Partial transfers are now allowed and you don't need to reapply for ISAs you already hold if the account has been dormant for one tax year

ISA transfers

Moving to a new cash ISA? Use a transfer form from the provider to keep the tax benefits. Make sure your current account is transfer-friendly.

Our guide to transferring an ISA provides a detailed roadmap for the process.

Alternatives to ISAs

  • Fixed-rate bonds offer higher rates for fixed-term savings but watch out for early withdrawal fees

  • Easy-access accounts provide flexibility but may have lower rates. Keep an eye on bonus rates and their expiry dates

  • High-interest current accounts can be lucrative, but they often come with strings attached, like minimum deposits or balance caps

Additional guides

We have a range of guides with more information about savings accounts and Isas, including:

Comparing ISAs with MoneySuperMarket

Before you choose a new ISA account it’s important to shop around and compare the different types of ISA on offer and the potential returns they offer.

MoneySuperMarket can help with your search as we list ISA accounts from a range of leading UK providers.

You can compare rates – see if they’re fixed or variable rates – or if they include a bonus rate. Once you’ve made your choice you can simply click through to the provider to start with the opening of your new ISA.

Compare ISAs