The Complete Guide to ISAs in the UK

Written by Elizabeth Anderson
Fact-checked by Steven Hatzakis
Edited by John Bringans

August 21, 2024

ISAs (Individual Savings Accounts) are great places to store your savings because you don’t have to worry about paying tax on income, dividends, or the growth of your investments. Some ISAs are great for short-term goals and others for planning your long-term financial future. I’ve held a variety of ISAs across several providers over the years – fixed cash ISAs for better interest rates, easy-access cash ISAs, and stocks-and-shares ISAs for long-term savings.

Regardless of your financial goals, you’re likely to find an ISA that suits your needs. My complete guide to ISAs will go over the benefits of holding an individual savings account, identify the various types of available ISAs, and go over some of my top tips for maximizing your savings within your ISA account.

What is an ISA (Individual Savings Account)?

An ISA (Individual Savings Account) is a type of savings account that allows investors in the U.K. to save or invest money, tax-free. There are several types of ISAs with cash or investment options.

Around 12 million ISAs are currently held by Britons, government figures show, making ISAs a popular way to save in the U.K. The total value across these accounts is £742 billion and around £67 billion is paid into adult ISAs each year. Around 7.1 million of those accounts are cash ISAs and 4 million are investment ISAs.

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How an ISA works

ISAs were launched in 1999 to encourage people to save or invest free from income tax, capital gains tax, or dividend tax. They are offered by a wide range of savings providers in the U.K., including banks, building societies, National Savings and Investments (NS&I), and investment platforms.

You can pay up to £20,000 per adult each tax year into ISAs, across several accounts or one account. Money can usually be taken out at any time – unless you have a fixed-rate cash ISA.

Types of ISAs available in the UK

Here's a breakdown of the types of ISAs available to U.K. investors:

Cash ISAs. These pay a fixed or variable interest rate.
Investment ISAs. Here, the return on your money depends on the performance of your investments.
Lifetime ISA. This type of ISA is for those looking to save for their first home or retirement. In addition to cash interest or investment growth, savers are given an annual bonus of up to £1,000 a year.
Help to Buy ISA. Designed to help people buy their first home, Help to Buy ISAs are no longer available to open but existing accounts can be paid into until 2029. They have been replaced by the Lifetime ISA.
Innovative Finance ISA (IFISA). Through an IFISA, you loan money to businesses and are repaid with interest. An IFISA is generally seen as high-risk.
Junior ISA. Available to children below age 18, a junior ISA allows you to save for your child without having to pay tax on interest or growth.
British ISA. There are plans for a ‘British ISA’ to be introduced in late 2024 or 2025. This carries an additional £5,000 allowance if you invest in UK-listed companies.

You may also have come across the term “AIM ISA”. This is a stocks and shares ISA that invests in higher-risk companies listed on London’s Alternative Investment Market (AIM). Investments in AIM-listed companies may be free of inheritance tax if the firms qualify for business relief and the investment has been held for at least two years and at the time of death.

Benefits of opening an ISA

If you are able to save money each month, it could be a good idea to prioritise paying these savings into an ISA before other types of savings accounts. ISAs offer U.K. investors and savers a tax-free savings account and a variety of ways to save on taxes.

Income tax savings

The money in your ISA is not subject to income tax.

Savings held in ordinary savings accounts may be subject to income tax. Basic-rate taxpayers can earn £1,000 in interest tax-free each year before paying tax through the Personal Savings Allowance. For higher-rate taxpayers (earning above £50,270), the Personal Savings Allowance drops to £500 a year and additional-rate taxpayers (earning above £125,140) get no savings allowance.

Capital gains and dividend tax savings

The money held in an ISA is not subject to capital gains tax or dividend tax. This means you won’t have to worry about paying tax on interest or the growth of your investments.

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Retirement savings

Individual savings accounts also offer a way to save for future retirement income. ISAs are popular among followers of the FIRE (Financial Independence Retire Early) movement in the U.K.

You can withdraw money from ISAs at any age, unlike private pensions which can’t be accessed until age 55 (rising to 57 in 2028). Those who retire at age 50, for example, will often rely on income from their ISAs to fund their living costs until their private pension kicks in, in their mid-fifties. The state pension doesn’t come in until age 66 (rising to 67 by 2028).

As mentioned above, income from ISAs is tax-free. So you could pay yourself an income of £20,000 a year from your ISA, and you won’t pay any income tax or national insurance.

ISA contribution limits and allowances

You can pay up to £20,000 a year across all adult ISA accounts. This annual ISA allowance has remained frozen since 2017. There is no lifetime limit on the amount that can be saved in an ISA (beyond the annual subscription limit) or on the amount of income that can be earned tax-free.

The Lifetime ISA annual allowance is £4,000 a year. This counts towards your overall ISA allowance. So if you decide to put £4,000 into a Lifetime ISA, you can pay a maximum of £16,000 into other ISAs.

The Junior ISA annual allowance is £9,000 a year. This is separate from the adult ISA allowance. This means you could pay £9,000 into a Junior ISA and still pay £20,000 into your own ISA (or ISAs).

ISA fees

You should not pay any fees for a cash ISA. However, you may face penalties if you request to withdraw your money early from a fixed-rate ISA. This normally means you forfeit some interest.

You will likely pay fees for an investment ISA, as investing costs money. How much you pay will depend on the provider you choose and the investments you hold. Some, such as Freetrade and Interactive Investor, charge a flat monthly fee. Trading 212 offers a free investment ISA.

Other platforms, such as Hargreaves Lansdown or AJ Bell charge percentage fees for managing your account and may also charge trading fees.

Choosing the best ISA provider for your needs

The best ISA provider for your needs will depend on what you’re saving for. If you think you may need instant access to the money in your ISA account, an easy-access cash ISA may be the right choice for you. If you’re willing to tie your money up for one, two, or five years, a fixed-rate cash ISA may be more appropriate. By choosing a fixed-rate cash ISA, you can lock in a set interest rate that is typically higher than an easy-access cash ISA.

If you’re saving for the long-term – say, five years plus – a stocks-and-shares or investment ISA may be a more appropriate choice. Data consistently show that savings invested in the stock market outperform cash savings over the long term.

How to set up an ISA account

It’s easy to set up an ISA account. Perhaps the hardest part is choosing an ISA in the first place.

Search online comparison websites to see which provider is most suitable for you. Then go to the website of the ISA provider and apply to open one online. They are typically very quick to open and you can start paying in soon after opening.

travel_exploreImportant note:

You cannot set up an ISA account if you are a U.K. citizen living abroad. You must be living in the U.K. to open or pay into an individual savings account.

ISAs vs SIPPs

Both ISAs and SIPPs are tax-efficient ways to save for retirement; each option has its own unique advantages for U.K. investors.

Financial advisers typically recommend that investors and savers prioritise SIPPs over ISAs for retirement savings, as the tax benefits are more generous. With SIPPs, you get tax relief on contributions when you pay in. With ISAs, on the other hand, contributions come out of your post-tax income.

Investments in a SIPP can also grow tax-free, like with ISAs. When you withdraw money from your SIPP, the first 25% of withdrawals are tax-free. The remainder may be subject to income tax, depending on your annual income.

You can also pay more into a SIPP each year. You can pay up to £60,000 into a SIPP annually, although you can’t pay in more than you earn. So if you have an annual salary of £50,000, you could pay in up to £50,000 per year. In comparison, the ISA annual allowance is £20,000.

The big downside of a SIPP is that it may be several years before you can withdraw the money. SIPPs can be accessed from age 55 (rising to 57 in 2028). If you are several years from this age and think you’d need access to your money before then, an ISA may be more appropriate as there are no age restrictions.

FAQs

How many ISAs can I have?

You can have as many ISAs as you’d like. There are no limits to how many you can hold. It used to be the case that you could only pay into one cash ISA or one investment ISA each year. But as of April 2024, you can now pay into multiple cash or investment ISAs each tax year.

What are the ISA contribution limits in 2024?

The total amount you can contribute to ISAs in the 2024 tax year is £20,000 per adult. If you are a married couple, you could make use of both allowances to give your household a total annual ISA allowance of £40,000. The £20,000 annual ISA allowance has remained unchanged since 2017.

Does transferring an ISA count as opening a new one?

No, transferring an ISA does not count in the same way that opening a new ISA does. There is a very important distinction; transferring an ISA means you can keep your annual allowance. You can also transfer above the annual allowance.

For example, say you have £50,000 in an ISA and want to transfer it to another ISA provider. You could request a transfer and move the whole lot, and you would still be able to pay in a further £20,000 that tax year. But if you withdrew the money to another savings account, you could then only pay £20,000 back into an ISA.

Worth noting: As of April 2024 you can now make partial transfers. You don’t have to transfer the whole balance of an ISA.

Do I pay tax on ISA withdrawals?

No, you won’t need to pay tax when taking money out of your ISA; ISAs are completely tax-free.

Who are Individual Savings Accounts (ISAs) best suited for?

ISAs are suitable for any UK resident who is managing to save money from their salary or income. There are a wide range of ISAs suitable for any type of saver, whether you are saving for the long term or short term.

What are some tips for maximizing ISA savings?

I’ve been using ISAs for my own investing and saving for many years; here are some tips for taking advantage of ISAs and maximizing your savings:

The most obvious way to maximize your ISA savings is to take advantage of the full £20,000 annual limit – although of course many people cannot save this much each year.
Married couples can maximize their ISA account savings by combining their respective £20,000 annual contributions, bringing the total household ISA allowance up to £40,000 a year.
Transfer cash ISAs regularly to ensure you are getting the best interest rate possible; many providers offer rates that are lower than inflation.
Consider maxing out your ISA at the start of the tax year, rather than waiting till the end, to give it further time to grow.
Commit to regular monthly payments if you don’t have enough for a lump-sum payment and prefer to save little and often. With an investment ISA, the benefit of regular investing is that you can benefit from pound-cost averaging – where you reduce the risk of buying into the stock market at the wrong time.

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About the Editorial Team

Elizabeth Anderson, lead writer and researcher, has been a financial journalist for more than a decade. In addition to her work with UK.StockBrokers.com, she has written extensively for major publications including BBC, The Times and Bloomberg. A keen investor herself, she is passionate about helping people understand finance and investing.

Steven Hatzakis is the Global Director of Online Broker Research for UK.StockBrokers.com and ForexBrokers.com. Steven previously served as an Editor for Finance Magnates, where he authored over 1,000 published articles about the online finance industry. Steven is an active fintech and crypto industry researcher and advises blockchain companies at the board level. Over the past 20 years, Steven has held numerous positions within the international forex markets, from writing to consulting to serving as a registered commodity futures representative.

John Bringans is the Managing Editor of UK.StockBrokers.com. An experienced media professional, John has close to a decade of editorial experience with a background that includes key leadership roles at global newsroom outlets. He holds a Bachelor’s Degree in English Literature from San Francisco State University, and conducts research on forex and the financial services industry while assisting in the production of content.