What is an Individual Savings Account (ISA)?

Since their introduction in 1999, ISAs have become one of the most popular and tax-efficient ways to invest and save for the future. 

In 2014, the Chancellor announced sweeping changes to ISA regulations designed to encourage saving.  These included bigger tax breaks and greater flexibility. 

Cash ISAs

Cash ISAs are tax-free savings accounts.  You pay no tax on the interest you earn.  You can open some ISAs with as little as £1. Cash ISAs can also make use of ISA flexibility.

Different types of cash ISAs offer different ways to access your money. These can include:

• Instant access - Where you can put money in and take your money out whenever you need to.
• Limited access - Where you can only take your money out a certain number of times. If you go over this withdrawal limit, your interest rate will drop.
• Fixed rate - Where you lock away your money for a fixed term, knowing that your interest rate won't change.

You can only have one 'active' cash ISA every year.  This means that you can’t open multiple cash ISAs in a single tax year and benefit from the tax-free savings allowance in each of these cash ISAs.

Stocks and shares ISAs

You can think of a stocks and shares ISA as a wrapper that sits around a portfolio of investments.  This wrapper means you have no tax to pay on any dividends, growth, interest or income you get from the investments.

If you're happy to invest for the long term, a stocks and shares ISA could help you beat inflation and build a nest egg for the future.  You can open a Stocks and Shares ISA with a lump sum, or, if your chosen provider allows, make regular monthly contributions.  Keep in mind, the value of your investments can go down as well as up, so you may get back less than you first put in.

Annual ISA Allowance

The ISA allowance for the 23/24 tax year is £20,000.  You can save this amount into a cash ISA, stock and shares ISA or a combination of the two, as long as you do not exceed the £20,000 allowance in a single tax year.

ISA flexibility

ISA flexibility allows you to replace any money you take out of your ISA during a single tax year without it counting towards your annual ISA allowance.  For example, if you pay £20,000 into your ISA at the start of the tax year and you then have the need to withdraw £5,000, you can replace that £5,000 before the end of the tax year and you will not have exceeded the £20,000 allowance.

Junior ISAs

A Junior ISA is a tax-efficient way of saving for your child's adult life.  You can open a Junior ISA for a child if they're under 18, and you're their parent, or in a position of parental responsibility.

As with an adult ISA, a Junior ISA shelters your child's investments from capital gains and income tax.  You can put in up to £9,000 a year, letting you build up a tax-free nest egg for your child, who can access the money when they turn 18.

Only parents or guardians are able to open a Junior ISA, but anyone can pay into them (such as generous grandparents or friends).