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Full ISA Guide

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Updated July 2016

Green tax free ISA Piggybank growing your money

Many people think ISAs are complicated. That perception grew last year when ISAs got the biggest overhaul they've had since they were launched.

But, even though the rules have changed, the premise stays the same. ISAs are simply tax-free accounts for your savings or investments. This guide answers your most common questions about them, including what the changes are. We'll also guide you through how you can save for your kids.

What is an ISA?

It's a savings account you never pay tax on, it's as simple as that. You can save up to a maximum of £15,240 in 2016/17, and this can be in a cash ISA, a stocks and shares ISA, an innovative finance ISA, a Help to Buy ISA or a mixture of all of them (with a little wrangling).

How much can you put into an ISA?

Each tax year, you get an ISA allowance which sets the maximum that can be saved within the tax-free wrapper from April to April.

The old ISA system used to limit how much you could put into each pot - you'd either get half your allowance in cash and half in shares, or you could choose to put it all in shares.

But since July 2015, the rules were almost completely relaxed. Although you still have a limit to the amount you can save - £15,240 from 6 April 2016 - you now get to choose how you split this between stocks & shares, cash ISAs and as of April 2016, the new innovative finance ISAs (for tax-free peer-to-peer savings, though most P2P platforms are still waiting for full FCA approval).

You even get to choose whether you want to split it - if not, you can use the whole amount for stocks & shares, the whole amount for cash or the whole amount in an innovative finance ISA.

How you can split your ISA allowance:

  • Use the maximum allowance for cash or investing. You can put all the £15,240 in a cash ISA. Or, invest the whole lot in an investment ISA. Or, put it all in an innovative finance ISA.

  • Mix 'n' match. Split the allowance between cash, stocks & shares, or innovative finance ISAs. You get to choose!

    If you wanted to, you could invest £1,500 in a cash ISA, and £10,000 in a stocks & shares ISA and £3,740 in an innovative finance ISA. Or do it the other way around. The only rule is that, combined, your tax free ISA savings in the 2016/17 tax year don't exceed £15,240.

You must save or invest by 5 April, the end of the tax year, for it to count for that year. Crucially, any unused allowance doesn't roll over - so if you don't use it, you lose it forever. You'll get a new allowance the next tax year (£20,000 in 2017/18), but won't be able to contribute anything to the old ISA.

Any savings or investments which stay within the tax-free ISA wrapper will continue to earn interest and reap the tax benefits until you withdraw the money.

This means it's possible to have substantial amounts invested tax free: £7,000 per year from 1999 to 2008, £7,200 per year until 2010, £10,200 for 2010/11, £10,680 in 2011/12, £11,280 for 2012/13, £11,520 for 2013/14, £15,000 for 2014/15, £15,240 for 2015/16 and £15,240 for 2016/17 plus the gains (interest or investment returns) made in each year.

What ISA type should you pick?

There are four main types of ISA - cash ISAs, Help to Buy ISAs, innovative finance ISAs and stocks and shares ISAs.

Cash ISAs explained

Use a standard instant access savings account, and if you've large amounts of savings, you'll have to pay tax on the interest. Basic-rate taxpayers have to give 20% of the interest above the £1,000 personal savings allowance earned straight to the Government. For higher rate taxpayers, it's 40% above their £500 personal savings allowance. And for additional rate taxpayers, it's 45% on all savings interest - there's no personal savings allowance available for additional-rate taxpayers.

With a cash ISA, there's NEVER tax to pay on interest

Cash ISAs are simply savings accounts where the interest is NEVER taxed. And any interest you earn doesn't count towards your personal savings allowance, so if you'll earn a lot of interest, you can protect more of it in an ISA.

Just like normal savings accounts, there are a variety of cash ISAs available, including instant access, regular savers and fixed-rate deals. You don't have to pay to open a cash ISA. For details of the best payers, read Top Cash ISAs.

Help to Buy ISAs explained

Help to Buy ISAs launched in December 2015 for first-time buyers only. You can save £1,200 in the first month of opening, and then £200 per month after that. When you use the funds to buy your first home, the state adds a 25% bonus (up to a maximum of £3,000) onto your savings, helping you to buy the property.

Help to Buy ISAs are a type of cash ISA, meaning you can't usually hold both in the same tax year, though some providers allow you to split your allowance between the two. For full details, including of the best payers, see Top Help to Buy ISAs.

Innovative finance ISAs explained

Innovative finance ISAs encompass cash that you use for peer-to-peer lending. Open an innovative finance ISA and it means that any interest you get from lending your money to other people (or companies) isn't taxed.

However, this is more risky than putting money into a cash ISA. The very fact you're lending the money out means that there's a chance the borrower won't repay. Risks are mitigated by spreading your cash across multiple loans, or provider-backed safeguard funds. As with any 'investing' the more risk you take, the more reward you could get.

For full information on peer-to-peer lending and innovative finance ISAs, see our peer-to-peer lending guide.

Stocks & shares ISAs explained

You can also use your ISA for investing. This type of account is called a stocks & shares ISA, where you can invest in funds (shares or bonds from various companies pooled into one investment), bonds (basically a loan to a company or a government), and shares in individual companies.

Stocks & shares ISA platform on smartphone

Stocks & shares ISAs are typically managed by an online service (often called an online broker or platform), fund management group or fund supermarket.

If you wish to open a stocks & shares ISA, you need to be aware that many of these companies charge a fee for you to open and hold a stocks & shares ISA. Some even charge you if you want to change any of your investments, withdraw your money or move it to another company.

Some stocks & shares ISA providers may allow you to hold some of your allowance as cash within the stocks & shares ISA. But you're free to open separate accounts if you prefer.

For the cheapest way to invest tax efficiently, read the Stocks & Shares ISA guide.

Tax benefits of a stocks & shares ISA:

Placing investments inside an ISA wrapper provides three tax advantages:

  • No tax on profits. You don't have to pay any capital gains tax on profits made from share price increases.

    Invest outside an ISA and any profits made above the annual capital gains tax allowance (£11,100 for 2016/17) would be subject to tax at 18% for basic-rate taxpayers and 28% for higher-rate and additional-rate taxpayers. You make a profit when you sell a share for more than you bought it for.

  • No tax on interest earned on bonds. So you get to keep it all.
  • No tax on dividend income. Inside an ISA, you don't pay tax on dividends. Outside an ISA, you'd get a £5,000 dividend income allowance, and above that higher and additional-rate taxpayers would pay 25% and 30.56% respectively.

Remember, there's ALWAYS a risk involved when investing, as your investments can go down as well as up. The general consensus is that it's a long-term game - you should put money away for a minimum of five years to smooth out any ups and downs.

Should you get a cash ISA, an investment ISA or an innovative finance ISA?

This isn’t about choosing which one is best - that depends purely on your attitude to risk. It's about whether you gain more from putting savings into a cash ISA, using your ISA allowance for investing or using it to lend money to others through peer to peer platforms.

The gain from putting cash into a cash ISA or innovative finance ISA is simple: you never get taxed on the interest. But with investing, whether you actually gain from putting it in an ISA depends on your circumstances.

Confused about how ISAs work? read our guide full ISA guide
  • Are you eligible for capital gains tax? Stocks & shares ISAs exempt you from capital gains tax (a tax on profits which you only pay when you sell your investments). Yet you can make £11,100 a year of profits before being hit by this tax, so this protection only helps those who are selling sizeable assets within one tax year – otherwise it's irrelevant.
  • Will you put money into bonds? If you’re investing in bonds, a stocks & shares ISA will shelter the income from tax.
  • Will you get an income? If you receive dividend income, outside an ISA you get a £5,000 allowance before starting to pay tax. Within a stocks & shares ISA you don't pay tax on dividend income. So unless dividend income is significant, it may not be worth it.

IN SHORT: Big investors, especially those putting money in bonds and shares, could see benefits from maxing out their stocks & shares ISAs to the £15,240 limit.

These days, though, all savings are paid tax-free, so is a cash ISA worth it?

On 6 April 2016 the new personal savings allowance (PSA) launched. It means all savings are now automatically paid tax-free. Basic 20% rate taxpayers can earn up to £1,000 interest a year without needing to pay tax on it, higher 40% rate taxpayers £500 (top 45% taxpayers will always pay tax on savings)

For most people that will be enough to make all their savings tax-free, and therefore the question is simply "what pays the highest rate?"

The answer to that isn't cash ISAs. So for most people with under around £20,000 of total savings, cash ISAs won't be a winner. For example the Santander 123 account pays 3% on £3,000 to £20,000, more than double the top easy-access ISA - though it's falling to 1.5% from November.

In fact all ISAs are easily beaten for most people by both top bank account savings, where you get a high rate as part of your current account, and regular savings accounts.

So when is a cash ISA worth it?

The most important thing to note is that cash ISA interest doesn't count towards your PSA, so you can earn it tax-free, and still have your full £1,000 (or £500) PSA allowance. Therefore for top-rate taxpayers or bigger savers who've used up the PSA, there are big tax advantages of saving in a cash ISA.

- Basic-rate taxpayers over the PSA limit.  For every £100 interest you earn in normal savings you only get £80, whereas in an ISA you get the whole £100. Therefore the normal savings rate would have to be 25% higher for it to beat a cash ISA.

- Higher-rate taxpayers over the PSA limit. For every £100 interest you earn in normal savings you only get £60, whereas in an ISA you get the whole £100. Therefore the normal savings rate would have to be 66% higher for it to beat a cash ISA.

- Top-rate taxpayers. For every £100 interest you earn in normal savings you only get £55, whereas in an ISA you get the whole £100. Therefore the normal savings rate would have to be 82% higher for it to beat a cash ISA.

So cash ISAs can be winners even with lower rates. Also it's worth remembering that while £1,000-a-year interest seems a lot now with our current pitiful interest rates, if interest rates rise then more people will need to pay tax. So saving into an ISA now could protect you from future tax.

For more on this, read the full Why the cash ISA isn't dead guide.

Who can open an ISA?

You need to be a UK resident aged 16 or over to open a cash ISA, or aged 18 or over to open a stocks & shares ISA or innovative finance ISA. You can't open an account together with someone else, or on behalf of someone else.

There's also a mini version for kids, called a junior ISA, which works in a similar way. One little anomaly is that 16-18 year olds can open a cash ISA and a junior ISA in the same year, meaning they're able to save up to £19,320 a year (in cash) tax-free.

How can you withdraw money?

A common mistake is to think an ISA needs to be held for a set length of time in order to reap the tax-free benefits. Luckily, that's wrong. Providing the rules of the individual product allow it (there are loads that do), you can have full, instant access to your money without losing the tax benefits on the rest of your savings within the ISA.

But what happens once the money's withdrawn depends on the type of ISA you've got. If it's a non-flexible cash ISA once the money is withdrawn it can't be returned. A few examples should help clarify this.

Situation: Mr Rich Devil invests £15,240 in a stocks & shares ISA at the beginning of the tax year.

Options: He may sell the whole investment, or part of it, at any time without losing the tax benefits. But he can't put any more money into his ISA that year.

Situation: Ms Irma Indecisive invests £2,000 in a cash ISA at the start of the tax year.

Options: She may save up to a further £13,240 in the cash ISA, or £13,240 in a stocks & shares ISA (or a mix of the two) before the end of the tax year.

Situation: Irma then decides she needs to withdraw £1,000 of this cash.

Options: There's no problem withdrawing the money; while the £1,000 was in the ISA its interest wasn't taxed. However, the fact she has withdrawn the cash doesn't increase her allowance at all - she can still only put £13,000 more in the cash ISA, or the same in the stocks & shares ISA,

Since April 2016 some banks have also offered flexible ISAs, so if you withdraw money from one of these you're free to put it back into the same account in the same tax year without affecting your allowance. You can read more about this in our Flexible ISA guide.

It's also worth noting that if you have an ISA that pays interest annually, and you decide to close it before the interest is due to be paid, you will still get the accrued interest paid on the account (less any penalties for closure/withdrawal - check your T&Cs).

Can you switch provider once you're set up?

There's nothing stopping you switching provider for cash or stocks & shares ISAs or vice versa. In fact, to make sure you continually get a top rate, this will be essential, particularly for cash ISAs. Yet it isn't like switching a standard savings account, as transferring an ISA is a technical process.

As long as you abide by our golden ISA transfer rule, it should go smoothly:

Never, ever, ever, ever withdraw the money yourself! You'll immediately lose all the tax benefits.

Instead, speak to the new provider and fill out a transfer form. Your new provider should then sort it all out, including contacting your current provider, and moving the money over for you.

If you transfer a stocks & shares ISA, it may be necessary to pay another initial set-up charge. Some stocks & shares ISA providers (and some fixed cash ISA providers) also charge you for withdrawing your money or leaving them.

That's the key thing to remember. But when transferring ISAs, what you can do depends on which type of ISA you want to transfer.

Transfer rules:

  • Current year's cash ISA. You can move ALL of this to another cash ISA, or into a stocks & shares ISA. You can't split it between more than one provider.

  • Current year's stocks & shares ISA. You can move ALL of this to another stocks & shares ISA or cash ISA, but you can't split it between more than one stocks & shares ISA.

  • Past years' cash ISAs. You can move ALL of this to another cash ISA or into a stocks & shares ISA, or you can SPLIT it between more than one cash ISA or stocks & shares ISA.

  • Past years' stocks & shares ISAs. You can move ALL of this to another stocks & shares ISA or cash ISA, or SPLIT it between more than one stocks & shares or cash ISA.

Not all ISA providers will accept transfers of previous years' allowances. To see the best ones that will, read the Transferring Cash ISAs guide.

Following a ruling by the Office of Fair Trading (as was(, a cash ISA transfer should take no more than 15 business days. Stocks & shares ISAs shouldn't take more than 30 days to transfer.

Can you get an ISA for your kids?

Yes, you can. There's a version of the ISA for kids called a junior ISA (JISA). Just like the adult version, it allows you to save tax free on behalf of a child. You can save or invest for your child, or do a bit of both.

Junior ISAs in a nutshell:

  • You can save up to £4,080 a year into a JISA (£4,128 from April 2017) - this is just over a quarter of the adult ISA allowance.
  • You can divide the annual allowance whichever way you like - so you can put it all in cash or all in stocks & shares (or any mix of the two).
  • Your child can't touch the money until they turn 18 - The account is held in the child’s name but is opened and managed by you. The child can take control at 16, but can't touch the cash until 18 (at which point it's their cash, not yours).
  • Your child can only hold a cash JISA with one provider - and it works the same with a stocks & shares JISA. This means you top up with the same provider each year. If you're unhappy with the provider or you spot a better deal somewhere else, you can always transfer your child's JISA to another company.

JISAs replaced Child Trust Funds when they were scrapped for new savers on 3 January 2011. This means JISAs are only available to children born on or after that date, or children aged under 18 but born before 1 September 2002, when the CTF was introduced, and so never had the chance to contribute to a CTF. ISA building blocks to larger tax free savings over time

However, anyone with a Child Trust Fund account can now transfer it to a Junior ISA account. In most cases, this will be the right thing to do, but not all. To check if it's right for you, read the Child Trust Fund guide.

When your child turns 18, the money belongs to them to do with as they like. You might want them to use the money for a house deposit or studying, but they could decide to blow it all on partying - and you wouldn't be able to stop them.

INTERESTING FACT: If your child is 16 or 17, they get two ISA allowances - the Junior ISA allowance PLUS the adult cash ISA allowance of £15,240.

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