What is an ISA? 

An Individual Savings Account (ISA) is a tax-efficient way to save or invest. It allows you to earn interest or returns without paying income or capital gains tax. 

Introduced in 1999 by then-Chancellor Gordon Brown, ISAs replaced the Tax-Exempt Special Savings Accounts (TESSAs) and Personal Equity Plans (PEPs) that were previously available. 

There are currently five different types of ISAs to suit various financial goals. 

1) Stocks & Shares ISA

Also known as an Investment ISA, a Stocks & Shares ISA lets you invest in assets like company shares, bonds, and investment funds.

This option is best for those willing to invest long-term (at least five years) and who are comfortable with potential risks, since the value of your investments could go down as well as up.

However, this also gives you an opportunity to earn higher returns than you can from your cash savings.

Best for:

• Long-term investors seeking higher potential returns.
• Those comfortable with market risks.
• Anyone over 18 years old.

2) Cash ISA

A Cash ISA mainly works like a traditional savings account. The benefit being that when you hold a Cash ISA, you don’t pay any tax on the interest you earn – while with a traditional bank or building society’s savings account, you will usually pay Income Tax on earnings.

Best for: 

• Low-risk savers.
• Those who want a tax-free savings choice. 
• Individuals aged 18 and over.

3) Lifetime ISA (LISA)

Designed for first-time homebuyers and for long-term savers planning for retirement. LISAs have become the go-to for first-time property buyers since the ‘Help-to-Buy ISA’ scheme stopped being available to new customers in 2019. 

You can contribute up to £4,000 annually, with a 25 per cent yearly government bonus. Funds can only be used to buy a first home (under £450,000) or withdrawn after age 60, with penalties for early withdrawal.  

Opting for a Lifetime ISA means you can hold cash or investments, or a combination of both. 

Best for: 

• First-time homebuyers.
• The self-employed planning for retirement.
• Individuals aged 18 to 39. You must open and fund a LISA before you turn 40

4) Innovative Finance ISA (IFISA)

An IFISA allows tax-free investment in peer-to-peer (P2P) lending and crowdfunding bond/debenture opportunities.

While returns may be higher than traditional options, there is significant risk since investments are not protected by the Financial Services Compensation Scheme (FSCS).

Please note that EQ Investors does not offer these products. 

Best for: 

• Individuals looking to diversity their investment portfolio.
• Direct ethical investments for small amounts.  
• Individuals aged 18 over. 

5) Junior ISA (JISA)

A JISA is a tax-free savings or investment account for children under 18. Parents or guardians can open one, and anyone can contribute up to £9,000 annually. At 18, the JISA converts into an adult ISA, giving them the opportunity to keep building their financial future in a tax-efficient way.

Launched in 2011 to replace Child Trust Funds, Junior ISAs enable you to save and/or invest for your children in a tax-efficient way.

You can open a Junior ISA for your child at any time, as long as they’re under 18, live in the UK, and don’t already have a Child Trust Fund.

Best for: 

• Parents giving their children a head start in life.
• Gradually introducing children to concepts of investing and savings.
• Grandparents can use to reduce how much inheritance tax is due.

How many ISAs can I have?

Aside from the Lifetime ISA (one per adult) and the Junior ISA (one of each type per child), you can open as many of the other ISA types as you like.

However, if you have ISAs with multiple providers, it can be harder to keep track of what you’ve paid in where. If you realise you’ve exceeded your allowance, contact HMRC to let them know.

How much can you put in an ISA?

There is a limit on how much you can pay into your ISAs each year. For the current tax year, the total ISA allowance is £20,000.

LISAs work a little differently. With these, you can only save up to £4,000 each tax year, with the government adding a 25% bonus. The LISA limit of £4,000 counts towards your £20,000 annual ISA limit.

If you’d like to save on behalf of a child, you can also open a JISA to save an extra tax-free sum. For the current tax year, that’s up to £9,000.

An informed approach to ISA planning

Whether you’re new to ISAs or want to make sure your money is working is hard as possible, our financial planners  are happy to talk to you about your saving options. For more details about how we can help, please get in touch.

Please remember, this content is provided for information purposes only. Investment involves risk. Past performance is not a guarantee or indication of future results. Investment return and the principal value of an investment may go up or down and may result in the loss of the amount originally invested. All investors should seek professional advice prior to any investment decision, to determine the risks associated with the investment and its suitability.