What is an ISA?

As interest rates have fluctuated over the years, so has the ISA’s (Individual Savings Account) competitiveness against other types of savings accounts. 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. We also take a look at some of the alternatives to ISAs, including fixed rate bonds and notice accounts.

An ISA savings account  – which stands for ‘Individual 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 
• Junior 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. ISAs are available through a variety of providers including banks, building societies, stockbrokers, credit unions and other financial institutions.

There are several 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.

1. 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.
2. 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.
3. 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.

Some cash ISAs are flexible, meaning you can deposit and withdraw money from your account without it impacting your yearly tax-free allowance. The main stipulation is that you replace any money you take out within the same tax year. This is different to a non-flexible ISA, where any funds you withdraw will still count towards your ISA limit for that year.

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.

5. Junior ISA

A junior ISA is a savings account that you can set up for a child below the age of 18. They’re often created to help secure a more stable financial future for the next generation. While the ISA will be in your child’s name, you or a legal guardian will need to open and manage the account until they turn 18. There are two types of junior ISA – a cash savings account or stocks and shares. 

There’s also another type of ISA specifically designed to help first-time buyers save for a mortgage deposit. The Help to Buy ISA gives you the chance to earn a 25% government bonus, worth up to £3,000. These accounts are now closed to new applicants but if you’re an existing account holder you can continue to save into your Help to Buy ISA until 30 November 2029.

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.

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.

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.

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.

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.

While ISAs are tax-free, it’s worth remembering that the personal savings allowance (PSA) means most people won’t pay tax on their savings anyway. Unless you expect your savings income to exceed the PSA (set at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers) it might be worth considering non-ISA savings products.

Fixed rate bonds can be a good alternative to ISAs, especially if you’re a long-term saver. 

They typically offer competitive interest rates in return for locking away your money for a set period, usually between six months and five years. Generally speaking, the longer the term, the higher the interest you’ll receive at the end. You can read more about the differences between fixed rate bonds and ISA on our website.

If you’d like a little more flexibility, a notice account may be a suitable option. These accounts still offer a competitive interest rate but they allow you to withdraw your savings after a set notice period. The notice period can vary depending on the account, but it’s typically between 30 and 90 days.

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.