How does an ISA work?
ISAs are a popular way to save and invest.
With an ISA, you can invest a set amount of money each year, without having to pay any tax on your returns. The only restriction is that there is a limit on how much you can invest each year – this is known as your annual ISA allowance. For the tax year 2024/25, the annual tax allowance is £20,000.
But how do ISAs work? Find out more in our short guide below.
What does ISA stand for?
ISA stands for Individual Savings Account.
It is a type of UK savings account that is exempt from tax.
The main defining feature is that it offers tax-free interest on your savings, meaning you may get more for your money if you choose to invest your funds in this way. However, the amount of money that you can invest in ISAs each year is limited, and may change with each tax year.
Are there different ISA options?
In the UK, there are two main types of ISAs available:
- Stocks and Shares ISAs
- Cash ISAs
But what is the difference?
A cash ISA is a savings ISA. It works in a similar way to a normal savings account – and you simply earn tax-free interest on the amount you pay in.
A Stocks and Shares ISA, on the other hand, is an investment ISA. Rather than saving the cash you pay in, you are investing in things like stocks and shares, bonds, gilts, or commercial properties. Stocks and Shares ISAs are intended to be more of a long term investment. Because your cash is invested, rather than simply saved, this type of ISA offers the potential to earn a greater return on your savings. However, it’s important to remember that the value of your investments can also fall and you may not get back the full amount you originally invested.. As with a cash ISA, any interest received will be tax-free.
Lifetime ISAs and Junior ISAs are also available, and these be opened as either a stocks and shares ISA, or a cash ISA.
What is a Lifetime ISA?
A Lifetime ISA is a tax-free savings account available for people aged between 18-39. The Lifetime ISA is designed to encourage tax-free saving, specifically for buying your first home or saving towards your retirement.
When you open a Lifetime ISA, you can pay in up to £4,000 each tax year (6th April – 5th April the following year), up to the age of 50. The government will then add a 25% bonus each month to help boost your savings. This means, if you save the maximum £4,000 per year, you will be guaranteed a £1,000 bonus each year, on top of any interest or investment returns.
The Lifetime ISA is designed:
- To help buy a first home worth up to £450,000, at any time from 12 months after you first pay into the Lifetime ISA.
- To build additional savings for your retirement from age 60.
When did ISAs start?
ISAs were first introduced on 6 April 1999, replacing Personal Equity Plans and Tax-Exempt Special Savings Accounts.
Junior ISAs were then introduced in 2011 to replace the Child Trust Fund; and the Lifetime ISA started in April 2017.
How much can you put into an ISA?
The 2021/2022 ISA allowance is £20,000. This means you can invest £20,000 in your ISA during the financial year, tax free. Although the ISA allowance has remained at £20,000 since 2017/18, it can change, so it’s always worth checking the current limit.
When investing in an ISA, you should also be aware that, although you can invest in multiple ISAs, your ISA allowance applies across all of your accounts. You don’t get £20,000 per ISA.
You can save into one Cash ISA and one Stocks and Shares ISA each year, up to £20,000 in total. If you open a Lifetime ISA, the limit for paying into your Lifetime ISA is £4,000 per year, so you will still have £16,000 of your annual £20,000 allowance left to pay into another ISA.
The POIS ISA is provided by Foresters Friendly Society, which own POIS. You may get back less than you have paid in. Tax rules might change and depend on individual circumstances.
The content of this article is for information purposes only and does not constitute financial advice. We do not offer financial advice. If you’re unsure as to the suitability of a product you should seek advice from a Financial Adviser. You may have to pay for this advice.