What Type of ISA Should I Choose?

types of isas

Saving is a great habit to get into. What’s even better than your usual savings, are tax-free savings. That’s where ISAs come in. 🎉

An ISA is an Individual Savings Account, where the main difference to other types of savings accounts is that it offers tax-free interest payments. This could mean that you get more for your money with little-to-no extra effort.

There are a few things you need to know about with an ISA:

  • You can only have one ‘active’ cash ISA in each tax year (from 1st April to the 31st March the following year).
  • There’s a limit to how much you can save into an ISA each tax year – this year’s ISA allowance is £20,000, but this changes each year.
  • There are several different types of ISA accounts: Cash, Help to Buy, Stocks & Shares, Innovative Finance and Lifetime. We’ll talk more about each type below. 👇
  • You can split your allowance between several ISA products
  • If you don’t use your ISA limit in each tax year, it’s gone. Use it wisely if you have money set aside.
  • Most banks and building societies (and even some credit unions) offer ISAs so there’s quite a lot of choice out there.

 

Types of ISAs

Cash ISAs and Stocks & Shares ISAs used to be the only two main types on offer. This has changed in recent years, with the addition of a few other types of ISA to suit the changing needs of people in the UK.

Why do ISAs exist? They are put in place by the UK Government to encourage people to save for retirement, for a house deposit or for the future of their children. They recently raised the ISA limit up to £20,000 and introduced several new ISA products that offer new features for different needs.

We’ve outlined the different types of ISA currently available below – remember, you can find the latest allowances and rules on ISAs on the Gov.uk site. They change every tax year to keep in line with inflation, so make sure you know the allowance for your tax year.

 

Cash ISAs

A basic-rate taxpayer in the UK usually pays 20% income tax on top of their allowance. The more a taxpayer earns, the more they need to pay in taxes. With a Cash ISA, your money is not taxes at all and does not count towards a personal savings allowance. You can usually open a Cash ISA at your bank – you just need to ask them to open one for you. Depending on the type of Cash ISA you have, you may be able to withdraw money without paying any penalties or letting it affect your personal allowance.

There are lots of different types of Cash ISAs available, including instant access, regular savers and fixed rate. These all come with different conditions (just like normal savings accounts) so make sure you pick the right one for your circumstances to avoid being hit with penalties. At the moment, the highest return you’ll get from a Cash ISA in the UK is 1.26%.

 

Help to Buy ISAs

Help to Buy ISAs are a type of cash ISA for first-time buyers. You start by contributing £1,200 in the first month and then £200 a month after that. Once you purchase your first home with the Help to Buy ISA, the Government tops it up with a sweet 35% bonus (up to a maximum of £3,000) to help you onto the property ladder. 🏡

 

Stocks & Shares ISAs

With a Stocks & Shares ISA you can invest in funds, bonds or individual stocks without paying taxes on your profits. They’re usually managed by an online brokerage or management platform and may come with a fee to open, hold, manage, withdraw or move your money. There’s no tax on profits, interest earned on bonds or dividend income with a stocks & shares ISA.

 

Innovative Finance ISAs

There are lots of different types of ISAs that are classed as innovative finance ISAs – it could be peer-to-peer lending, lending to businesses, crowdfunding or property. When you open an Innovative Finance ISA, any interest you get from lending money to other people or companies isn’t taxed.

Innovative Finance ISAs are appropriate for those who want to get into alternative investments. It’s important to understand the risks that come with investing in alternative assets so make sure you do your research before getting started.

 

Lifetime ISAs

You can save up to £4,000 a year into a Lifetime ISA (LISA), either as a lump sum or bit by bit. It’s designed to help you save for retirement, a house or both. The Government will add a 25% bonus on top before interest or growth. The bonus is paid into your account every year until you reach the age of 50 and is paid monthly (you earn interest on it too), with a maximum of £1,000 every year.

 

Why open an ISA?

Opening an ISA is a great way to save money: it shelters you from taxes, it doesn’t count towards your personal savings allowance and you get free bonuses from the government! You can also open one with as little as £1 and are free to pick investments that suit your level of risk. With many ISAs, you don’t necessarily lose access to your cash either – many are the equivalent to an easy access account where you can dip in and out as needed.

Choosing an ISA depends on your circumstances, attitude to risk and savings goals. If you’re not looking to buy your first home, a Help to Buy ISA probably doesn’t make a lot of sense. If you’re worried about the risk of peer to peer lending, innovative finance may not be for you.

It’s important to have a plan of what you want to achieve from investing or saving into an ISA, we’d recommend thinking about the following:

  • Your savings goals and objectives
  • How long you’re looking to tie up your money for
  • If you’ll be looking to invest more each year
  • What platform you want to use
  • How you feel about risk and the possibility of losses as well as gains
  • Whether you want to diversify and save across different types of savings product
  • The different types of savings, interest rates and returns on offer

ISAs are a great first step to saving and growing your investments. They’re a great place to save for an emergency fund and learn about the basics of money management. Once you feel comfortable with your savings and want to put your money somewhere that is safe but still beats inflation, gold is a great second step!

In short, ISAs can be a great choice for many people thanks to their interest-free wrapper and how accessible and easy they are to open. Although they may not sound like the most exciting way to save, they provide stability and safety to first time investors. How many ISAs do you have? 🤔

Araminta Robertson

Araminta Robertson

Araminta is a financial writer and self-professed Fintech nerd. She likes writing about investing, the future of payments and of course, gold.
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