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Perplexed by ISAs? Here’s the lowdown…

Don’t know your Lifetime from your Help to Buy? There is an increasing number of ISA products on the market and, with another one added into the mix this week, it can be easy to feel confused. ISAs aren’t always the best place to put your money, but knowing what they do and the returns you may expect can help make it easier to pinpoint whether they’re for you or not.

Essentially, all ISAs offer tax-free savings – you pay no Income Tax on the interest and any profits from investments are free of Capital Gains Tax.. The interest rate is set by your provider.

There are three main types of ISA – Cash ISAs, Stocks and shares ISAs and the new Innovative Finance ISA, which is based on P2P (peer to peer) lending. There are also some specialised ISAs such as the Help to Buy ISA and the Junior ISA. You can decide to split your allowance between the different types of ISA, subject to an annual limit, in any combination you wish.

Here we explain the main ISA product types you should know about.

ISAs explained

Cash ISA

Who is it for? Cash ISAs can be used by any UK resident aged over 16, who wants to earn tax-free interest on their cash savings
How much could you save? £15,240 for the 2016/17 tax year
Anything you need to know? You can only open one Cash ISA per tax year, but it is possible to transfer to another one, or to a Stocks and Shares ISA during this time. However, don’t forget, if you have a Stocks and Shares ISA and a Cash ISA at the same time, this still means the £15,240 limit applies across both products – it doesn’t double it. 
It used to be that, if you withdrew money from your ISA, you couldn’t reset your annual limit. From April 2016, ISA providers can offer a flexible facility which will allow greater freedom to withdraw and then replace money from your ISA, provided it’s done within the same tax year.  Check the terms and conditions of your ISA first, as it may not apply to all of them. Flexibility is currently not available for Junior ISAs or the Help to Buy ISAs.   



Stocks and Shares ISA


Who is it for? You must be over 18 and a UK resident for tax purposes to take out a Stocks and Shares ISA. 
How much could you save? £15,240 for the 2016/17 tax year
Anything you need to know? Lots of different investments can be held in a Stocks and Shares ISA, including investment trusts and corporate bonds. You can sell the assets held in your ISA at any time and there is no minimum length of time you need to hold it but it is recommended that you should be prepared to invest your money for a minimum of five years. You must also be comfortable with the fact your investments could go up and down.

Innovative Finance ISA (launched April 2016)

Who is it for? Lenders who are involved in P2P (peer to peer) lending. In essence, this type of ISA will mean those who choose to do P2P lending will no longer be charged Income Tax on the interest received from lending their money. 
How much could you save? £15,240 for the 2016/17 tax year
Anything you need to know? P2P lending can be risky. It involves lending out your own money – essentially like being your own bank manager. You can lend to individuals or businesses, and they would pay you back with interest. The risk would be if your borrowers couldn’t pay your money back or the platform becomes insolvent - theoretically, in this case, you could lose some or all of your money.


Help to Buy ISA

Who is it for? Those looking to buy their first home.
How much could you save? You can start off with an initial deposit of up to £1,000 in addition to your normal monthly savings of up to £200 a month. Then the government will top up your savings by 25% - so for every £200, the government will contribute £50, up to a maximum of £3,000. The maximum you can save is £12,000.
Anything you need to know? The minimum amount you need to save to qualify for the bonus is £1,

Junior ISA

Who is it for? You can open a Junior ISA for someone under 18 who lives in the UK. The child can’t have a Junior ISA as well as a Child Trust Fund. If you want to open a Junior ISA ask the provider to transfer the trust fund into it.
How much could you save? £4,080 for the 2016/17 tax year
Anything you need to know? Money in the account belongs to your child, but they cannot withdraw money from it until they are 18, apart from in exceptional circumstances. When they turn 18, the ISA is automatically rolled into an adult ISA.

Lifetime ISA (to be launched in April 2017)

Who is it for? Anyone over 18 and under 40 who is looking to save for their first home or for retirement
How much could you save? For every £4 someone pays into the Lifetime ISA, the government will top it up by £1. A maximum of £4,000 can be saved each year to receive the bonus. The bonus is paid until you hit 50 and is paid annually at the end of each tax year – once it is in your account it counts as your money. You’ll be paid interest on it too. The maximum bonus you could get is £32,000.
Anything you need to know? If you are using it to buy your first home, you can withdraw your money and the bonus after 12 months. It must be your first home, and cost less than £450,000.If you aren’t buying your first home you have to wait until you are 60 to receive the bonus. Take your money out before then and you’ll lose the 25% extra, and interest earned on the bonus payments. You’ll also have to pay a 5% fee. There are some exceptions, such as diagnosis of a terminal illness.

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