ISAs were first introduced by Gordon Brown back in 1999 as a means of tax-free saving. As interest rates have fluctuated over the years, so has the ISA’s competitiveness against other types of savings account. Despite this, ISAs are now an important part of many people’s savings strategies. Here, we explore what ISAs are, the different types of ISA you can open, how they all work and what you might want to consider when opening an ISA.
Table of Contents
- What does ISA stand for?
- What is an ISA savings account?
- What are the different types of ISA?
- How do ISAs work?
- Is an ISA tax-free?
- What is the ISA allowance?
- What to consider when opening an ISA
- Can you have more than one ISA?
- What are some alternatives to ISAs?
- Opening a savings account at Raisin UK
What does ISA stand for?
ISA stands for ‘Individual Savings Account‘. You can open an ISA with banks, building societies, stockbrokers, credit unions, and other financial institutions.
What is an ISA savings account?
An ISA savings account is a tax-free savings or investment account. You can save up to a maximum of £20,000 per tax year (traditionally 6th April to 5th April), and you can choose from a few different types of ISA:
- Cash ISA
- Stocks and shares ISA
- Innovative finance ISA
- Lifetime ISA
You can open more than one type of ISA, but the most that you can save per tax year applies to you as an individual, not to each account you open.
What are the different types of ISA?
There are four different types of ISA, all of which provide the benefit of tax-free savings:
1. Cash ISA
A cash ISA is similar to a traditional savings account. The difference is that there’s a limit of £20,000 on your deposits each tax year. There are three types of cash ISA: instant-access cash ISA, regular savings cash ISA and fixed-rate cash ISA.
- With an instant access cash ISA, you can deposit and withdraw money any time you wish without penalty, although your ISA provider may impose a limit on how often or the number of times you can do this. Instant access cash ISAs are a good option to consider if you want the flexibility to withdraw money from your savings but don’t know when you’ll need to do so.
- You usually earn a fixed rate of interest with a regular savings ISA, but it’s only fixed as long as you deposit an agreed amount of money each month. You can save up to £1,666 per month without going over the £20,000 annual limit.
- Similar to fixed rate bonds, fixed rate cash ISAs commit you to locking away your money for a set amount of time to earn a competitive interest rate. Typically, the longer the term, the higher the interest rate.
2. Stocks and Shares ISA
A stocks and shares ISA is an investment savings account that can include shares in companies, government and corporate bonds and investment funds. You can choose to open a managed account and pay for someone to manage your investments on your behalf, or you can make your own decisions on where to invest your money.
3. Innovative Finance ISA
Also known as an IFSA, an innovative finance ISA is a savings account that includes peer-to-peer loans, or investments you make in a business by buying its debt. This type of account matches investors with borrowers who do not want or cannot get a traditional bank loan.
4. Lifetime ISA
A lifetime ISA is only available to people over 18 and under 40, and it’s intended to help them buy their first home or save for retirement. Unlike other types of ISA, you can only save up to £4,000 per financial year in a lifetime ISA. The government will then add 25% to your savings up to £1,000 per year. You can only use this tax-free government bonus towards a first home purchase, to withdraw your funds if you are over 60, or if you are diagnosed with a terminal illness.
How do ISAs work?
Every tax year (traditionally 6th April to 5th April), you can save up to £20,000 in ISA savings accounts. You could put all your savings into one type of ISA, or you could split your savings across different types of ISA depending on your savings goals. The £20,000 limit is a combined limit across all the ISAs you hold, and you can only save into one of each type of ISA per year.
Is an ISA tax-free?
Yes, you will never have to pay tax on interest earned in ISA savings accounts. ISAs are a good option to consider if you have a lot of savings or are an additional rate taxpayer. If you intend to save into an ISA over a long period of time, the effect of compound interest can also be very financially rewarding.
What is the ISA allowance?
Every financial year, you get an ISA allowance of £20,000 tax-free. This typically runs from 6th April to 5th April. You can use this allowance across any number of ISAs as long as you stick within the £20,000 limit. If you don’t reach the limit, it won’t roll over to the next financial year.
What to consider when opening an ISA
The first thing you need to consider when opening an ISA is what you are saving your money for, as this will determine the type of ISA that’s best for you. For example, if it’s an emergency fund, you’ll need to be able to access it at short notice, so a cash ISA might be right for you. If you want to save over the long-term and take advantage of compound interest, a fixed rate cash ISA might be better. You might also consider fixed rate bonds, which typically offer competitive interest rates.
It’s also worth comparing the interest rates offered on ISAs and those offered on other types of savings accounts as you may be able to earn more interest with other types of savings accounts.
Can you have more than one ISA?
Yes, you can have more than one ISA. You are only allowed to open one cash ISA per year, but you can still hold any ISAs you’ve opened previously. Remember you can only save up to £20,000 per year, no matter how many ISAs you have.
Opening a savings account at Raisin UK
Although we don’t currently offer ISAs at Raisin UK, you can open other types of savings accounts from our partner banks through our marketplace. You first need to open a Raisin UK Account; then you can apply by logging in, applying for a savings account and transferring your deposit.
If you’ve got any questions, please contact our UK-based Customer Services Team, who will be happy to help.
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