Published: 16 May 2023
An Individual Savings Account, or ISA, is a savings account where you can earn tax-free interest (subject to various conditions).
In this guide, we'll tell you everything you need to know about ISAs.
How do ISAs work?
ISAs were introduced in 1999 to replace tax-exempt special savings accounts and personal equity plans. There are different types of ISAs to suit a range of savings ambitions, and the way they work can differ between the different product types.
How much can you put into an ISA?
You have an ISA allowance of £20,000 (£9,000 for Junior ISAs). This is the amount of money you can save or invest without paying tax on the interest you earn.
That means between 6 April this year and 5 April next year, you can save up to £20,000 and not pay any tax on the interest you earn. Once the new tax year starts, your allowance refreshes and you can save up to that amount again. Please check the ISA allowance limits each tax year, as they may change.
Are ISAs completely tax-free?
You'll only ever pay tax on an ISA if you exceed the current tax-free savings allowance of £20,000. How much tax you pay on interest earned above your allowance will depend on your tax bracket:
- Basic-rate taxpayers: 20%
- Higher-rate taxpayers: 40%
- Additional-rate taxpayers: 45%
If you’re a basic-rate taxpayer, you also have a personal savings allowance (PSA) that allows you to earn up to £1,000 of interest tax-free, on top of your £20,000 ISA allowance. You'll need to ensure you don’t exceed this, otherwise you’ll start paying tax on your interest.
Higher-rate taxpayers get a PSA of £500. Those on the additional rate don't receive a PSA, so will pay tax on any money saved beyond their ISA allowance.
How many ISAs can I have?
You can have as many ISAs open at the same time as you want. Your ISA allowance applies across all ISAs you hold.
For example: you might have a Cash ISA and a Stocks and Shares ISA. But you don’t get a £20,000 allowance for each one.
Is my money safe in an ISA?
Every type of ISA, apart from Innovative Finance ISAs, is protected by the Financial Services Compensation Scheme (FSCS) which covers a maximum of £85,000 per building society, bank, or credit union.
Who can open an ISA?
To open an ISA, you need to be:
- A UK resident – or crown employee (or their partner) if you don't live in the UK
- 18 or older for a Cash ISA
- 18 or older for a Stocks and Shares ISA or Innovative Finance ISA
- 18-39 for a Lifetime ISA
- A parent or guardian to someone under 18 for a Children's/Junior ISA
Types of ISA
What is a Cash ISA?
Cash ISAs offer much of the same functionality as a regular savings account, but with the addition of the tax-free ISA allowance. Tax treatment depends on individual circumstances and may change in the future. There are three primary types of Cash ISA:
- Fixed Rate Cash ISAs give you a fixed rate of interest on your savings that won't change for a set duration. You'll typically get a higher rate of interest than you would with variable rate accounts. There are cash withdrawal restrictions when it comes to Fixed Rate Cash ISAs, and withdrawals can lead to a loss of interest.
- Limited Access ISAs allow you to make a set number of cash withdrawals within a year. If you go over this number, you could face interest penalties. Limited access accounts tend to come with a variable rate of interest.
- Instant Access ISAs allow you to make unlimited withdrawals. Typically offering a variable interest rate.
We currently only offer Cash ISAs. Take a look at all of our Cash ISAs or find out more about how ISAs work.
What's a Stocks and Shares ISA?
With a Stocks and Shares ISA, you can put your money in a range of investments, including shares, funds, trusts and bonds. The value of investments can go down as well as up.
What's a Lifetime ISA?
Lifetime ISAs are government backed ISAs for people aged 18-39, designed to help people save for their first home or retirement. With a Lifetime ISA, you can save up to £4,000 each year and earn 25% interest on whatever you put in.
You can only open one Lifetime ISA, but you can keep putting money into it until you’re 50. You can access the money whenever you like, but you’ll only receive the 25% bonus if you use your funds towards your first home, or retirement after you turn 60. Take it out for anything else and the government will take back 25% of the total pot.
What's a Junior ISA?
A Children's or Junior ISA allows you to save money for your child until they're 18. They work like normal ISAs – for example, you can choose a Cash ISA or Stocks and Shares ISA – but the tax-free allowance is lower at £9,000. You'll need to open the account on behalf of your child as their parent or guardian.
Choosing the right ISA
With different ISAs to choose from, picking the right one can be a little daunting. By considering the following, you might get more of an idea of which ISA might be right for you.
- Access: Different ISAs have different restrictions, so knowing how often you'll need to access your money should help narrow down your options. For example, if you can put money away for the foreseeable future without touching it, a fixed rate over a long term might be best for you.
- Duration: Most ISA types give you different options when it comes to duration, so by deciding how long you’re prepared to save for, you can narrow down which accounts suit your needs.
- Risk: Stocks and Shares ISAs are a risk vs reward saving option. You might lose some of your money if your investments don't pan out the way you hoped, but the returns can be greater if things do go to plan. If you'd rather steer clear of any risk, an option like a Cash ISA safeguards your money while offering a steadier rate of growth for your savings. Tax treatment depends on individual circumstances and may change in the future.
Is an ISA for you?
Now you know more about ISAs, could one be the solution for your savings? You can take a look at our Cash ISAs or compare our full savings range.
Got a question? Contact us and we'll do what we can to help.
Leeds Building Society. No reliance should be placed on this guide. We recommend that you seek independent legal advice and/or financial advice if you have any questions or queries.
Cash ISAs are available to individuals aged 18 or over who are resident in the UK for tax purposes....
