Search

Popular searches

For further information about the Horizon IT Scandal, please visit our corporate website

  1. Home
  2. Savings accounts
  3. Saving Guides and Articles
  4. What is an ISA

What are ISAs and how do they work?

Want to know more about ISAs, the different options available and which of them might suit your savings needs? We can help with that.

Our short guide looks at how individual savings account (ISA) work and their benefits for savers. And it looks at popular account types such as cash ISAs, fixed rate ISAs, investment ISAs and Junior ISAs.

a person in a green jumper browsing a tablet and having coffee

Post Office ISAs are provided by OneFamily. Savings in Post Office cash ISAs are deposited with Bank of Ireland UK.

What is an ISA?

Individual savings accounts (ISAs) are a tax-efficient way to save and invest. Any interest, dividends or capital gains earned on the funds you put in ISAs are exempt from UK income tax and capital gains tax.

There’s a limit to how much you can save in ISAs in a given tax year. The number of ISAs you can pay into in that time may be limited too. We’ll cover all this in the next sections.

What are the benefits of ISAs?

People choose to save in ISAs for lots of reasons. These are some of the most common.

  • Your savings aren’t taxed: This means you can maximise the return on what you save
  • Choose how much you put in: You decide how much of your annual tax-free allowance you want to use each year. In the 2024-25 tax year, you can put up to £20,000 into ISAs
  • No need to report returns: If you make money within your ISAs, you don’t need to report it on your tax return

Types of ISA

There are several different types of ISA.

Variable Cash ISAs

Variable Cash ISAs work a lot like regular savings accounts. The difference is there’s no tax on what you save. They’re low risk, so you make a modest return on your savings. The interest rate is variable so may change over time.

The tax advantages of variable cash ISAs depend on your individual circumstances. The tax treatment may change in the future.

Fixed rate ISAs

Fixed rate ISAs offer a guaranteed interest rate for a fixed period. You lock in your savings and know exactly how much interest they’ll earn in that time. They're a good option if you won't need access to your money during the fixed term. This can help you save money for a specific goal such as a deposit for a house.

Investment ISAs

Investment ISAs let you invest your money in assets such as stocks, bonds and funds. You don’t pay tax on the income and capital gains earned from those investments.

They offer higher potential returns over the long term. But they also come with greater risk. Markets can fluctuate, so the performance of your investments might too. So you could get back less than you paid in.

They’re also known as stocks and shares ISAs.

Junior ISAs

Junior ISAs can give children a financial head start. Parents and guardians can open one on behalf of their children. The child receives the funds when they turn 18. They might use this for their education, a first home, travel plans or a big milestone. Cash and investment options are available.

Innovative finance ISAs

These ISAs let you invest in peer-to-peer lending or crowdfunding projects for potentially higher returns. Again, there are tax advantages. But the investments come with higher risk.

Lifetime ISAs

If you’re aged 18 to 39 and want to save for your future, a Lifetime ISA may suit you. It’s a tax-free way to save for milestones like your first home or even for later life, including retirement.

You can contribute up to £4,000 every tax year up to the age of 50. But the first must be before you’re aged 40. The government will also add a 25% contribution to these savings. That’s up to a maximum of £1,000 per year.

Choosing an ISA: which is right for you? 

The right type of ISA for you will depend on your individual circumstances and your savings or investment goals. Consider a few factors before choosing an account:

  • What interest rates do they offer?
  • Are these rates fixed or could they change over time?
  • Will you need access to your money?
  • Or could you lock it in for a longer period to get a better, more predictable return?
  • If investing some of what you save, how much risk will you tolerate?

Depending on your savings goals:

  • If you want to withdraw your money any time, an instant access cash ISA may suit you
  • If you’re comfortable with some risk, an investment ISA may help your money over time

It’s important to do your research. Make sure you compare different options before you decide where to save your money. And consider seeking independent financial advice before you invest.

You can read more about ISAS on the GOV.UK site or visit the Money Advice Service

Make the most of your tax-free savings allowance

Discover our ISA range

Common questions about ISAs

  • You can put up to £20,000 in ISAs in the current tax year. The exceptions are Junior ISAs, which have a £9,000 limit, and Lifetime ISAs, for which it's £4,000. This may change in future years. Please check the GOV.UK guidance on ISAs for the most up-to-date information.

  • Yes, you can have multiple ISAs in a tax year if you like.

    As of the 2024-25 tax year, these can be multiple cash ISAs, multiple stocks and shares ISAs, or a mix of both.

    Lifetime ISAs are limited to one. Likewise, you can only open and contribute to one of each type of Junior ISA (one cash, one stocks and shares) per eligible child.

  • The level of risk depends on which type of ISA you open.

    • Cash ISAs are generally low risk. You’re simply saving money in a tax-free savings account
    • There’s more risk with investment ISAs. The value of your investments can go up or down
    • The risk is higher with innovative finance ISAs as they involve peer-to-peer lending and crowdfunding

    The greater the risk the greater the potential returns. So it’s important to decide upfront how much risk you’re prepared to accept before choosing which ISAs to open.

  • Yes. Junior ISAs let you put money away for your children’s futures. As a parent or guardian, you can open and manage a Junior ISA on behalf of your child. The funds become available on their 18th birthday.

  • Some providers, but not all, will allow you to transfer funds between cash, stocks and shares and innovative finance ISAs.

    You can only transfer from a Lifetime ISA into another Lifetime ISA, and from a Junior ISA into another Junior ISA.

    Transferring funds between ISAs won't affect your tax-free ISA allowance.

  • See more FAQs

  • This depends on the account. With some ISAs, you can access your money any time without paying a penalty. With others, there may be a penalty if you withdraw funds before the end of the fixed ISA term. Or the funds you withdraw may impact your remaining tax-free ISA allowance for that year.

    Post Office ISAs for instance don't have flexible features. This means that once withdrawn, your money will lose the tax advantages of ISAs and cannot be replaced within the ISA without affecting your annual ISA allowance.

  • No. ISAs are exclusively for UK residents. If you move abroad, you can still hold and earn interest on existing ISAs. But you can't contribute into them.

  • The amount over the limit will be voided from the ISA in question. Any gain made on that amount will be taxable.

  • Yes. You can withdraw money from your ISA any time. There may be a penalty charge to do this early with some accounts. Check with your provider and the terms of your specific ISA.

Savings to suit you

  • Easy access savings

    Keep your money somewhere safe, but withdraw whenever you like

  • Fixed rate savings

    Saving for the longer term? Earn a fixed rate of interest for a set period of time

  • ISAs

    Save tax-free with a fixed or variable rate of interest, or even both

More about savings

A guide to savings
FSCS protection
Savings account interest rates