What is an ISA?
An ISA – short for individual savings account – is a type of saving or investing account available to residents of the United Kingdom, which offers a range of tax advantages.
Introduced in 1999, ISAs were designed to encourage people to save and invest by providing tax-free income and growth. The main appeal of ISAs is that any interest earned, dividends received, or capital gains made within the account are exempt from UK income tax and capital gains tax.
Different types of ISAs
There are several types of ISAs, each catering to different goals and objectives.
Cash ISA
This is a savings account, and money deposited in a Cash ISA earns interest, which is completely tax-free – making it a great place for your savings buffer.
Cash ISAs can be easy access, where your money can be withdrawn at any time, or fixed-term, where your money is locked away for a predetermined period in exchange for a higher interest rate. The Moneybox Cash ISA is easy access, and most banks support next-day withdrawals, meaning the money you withdraw will be with you the next working day.
Stocks & Shares ISA
This is an investment account, enabling you to invest in assetsAn asset is anything that holds value and which can be bought and sold freely. like stocksStocks, also known as shares or equities, represent units of ownership in a company., bondsThe financial world’s version of an ‘I owe you’, bonds can be issued by companies or governments. You’d invest in bonds to receive an annual interest payment, plus the initial value of the bond back when it ‘expires’., and fundsFunds, also called ‘tracker funds’, are financial instruments that have been set up to match or ‘track’ the price of a market index. Investing in a fund lets you get exposure to different financial assets like shares and bonds, without having to buy them directly.. The returns on these investments, including dividendsThe amount of profit that a company returns to its shareholders. and capital gainsThe profit you get when you sell an asset for a higher price than you paid to buy it. Quite literally, the ‘capital’ you’ve ‘gained’., are tax-free.
Stocks & Shares ISAs are suitable for people who have managed to build a savings buffer of between three to six months of their regular outgoings, and are now looking to achieve higher long-term gains on their money.
Learn more about Stocks & Shares ISAs
Lifetime ISA (LISA)
Introduced in 2017, Lifetime ISAs are designed to help you save for your first home or for retirement.
You can open one if you’re between the ages of 18 and 39, and they offer a government bonus of 25% on contributions, up to a maximum of £1,000 each tax year. The money can only be used for purchasing a first home, or withdrawn after age 60 for retirement.
Learn more about Lifetime ISAs
Junior ISA (JISA)
These accounts are designed for children under 18. You can get Cash Junior ISAs and Stocks & Shares Junior ISAs. The Moneybox Junior ISA is a Junior Stocks & Shares ISA, and it allows parents or guardians to invest on behalf of their children.
The money in a Moneybox Junior ISA cannot be accessed until the child turns 18, at which point it can be rolled over into an adult Stocks & Shares ISA.
Annual allowance and transfers
The UK government sets an annual contribution limit for ISAs, which determines how much can be deposited into the account each tax year.
As of the 2023/24 tax year, your annual ISA allowance is £20,000, which can be spread across different types of ISAs. You can also transfer ISAs from one provider to another without losing your tax-free status. Go to Settings > Transfer in an existing ISA in-app to get started.
Learn more about how your ISA allowance works
Pros and cons of ISAs
Pros of ISAs
- Tax efficiency: the primary advantage of an ISA is the tax-free growth on savings and investments.
- Flexibility: ISAs offer a range of options, from low-risk Cash ISAs to higher-risk Stocks and Shares ISAs, catering to different saving and investment strategies.
- Accessibility: funds in certain types of ISAs, like Cash ISAs, can be accessed easily, while others offer long-term growth potential.
Cons of ISAs
- Contribution limits: the annual contribution limit restricts how much can be saved or invested tax-free each year. If you hit your £20,000 annual ISA allowance, you can still continue to save or invest with regular accounts – you just won’t receive the same tax benefits.
RiskThe potential for loss. Usually, but not always, higher risk assets can have the potential for higher returns. : Stocks & Shares ISAs carry investment risk as the value of your investments can go down as well as up. With this account, it’s better to leave your money alone for five years or more to give it time to appreciate and grow.- Penalties for early withdrawal: with Lifetime ISAs, withdrawing your money before age 60 for purposes other than buying a first home incurs a 25% penalty.
In summary, ISAs provide a versatile and tax-efficient way to save and invest, with options to suit various financial goals and personal circumstances. They are a key component of many UK residents’ financial planning strategies.
