Which ISA should I get?

What type of ISA should I get?
The five different ISA types explained

Many people find ISAs confusing, which isn’t surprising given the wide range of choices available. However, ISAs are straightforward: they are accounts designed for your savings or investments, offering tax-free benefits for life. This guide will walk you through the essentials of the five different types of ISAs.

What is an ISA?

The term “ISA” stands for Individual Savings Account. Despite the sophisticated name, the idea is straightforward: it’s a savings or investment account where your earnings are not subject to tax. Each tax year, you’re granted an ISA allowance, which determines the maximum amount you can save without incurring any taxes.

How much can I save in an ISA?

For the 2024/25 tax year, the maximum amount you can contribute to an ISA is £20,000.

You have the flexibility to either allocate the entire amount to a single type of ISA or distribute it across multiple types. However, regardless of how you split it, the total contributions across all ISAs cannot exceed £20,000.

To have your contributions count towards the current tax year’s allowance, you must make your deposits or investments by April 5, the last day of the tax year. Importantly, any unused portion of your allowance does not carry over to the next year—if you don’t use it, it’s lost. A new allowance is provided each year starting on April 6 when the new tax year begins.

Funds kept within the tax-free ISA wrapper will continue to earn interest (or experience investment gains or losses) and enjoy the associated tax benefits until you decide to withdraw the money.

What are the different types of ISA?

Here’s a brief table that provides an overview of the five different types of ISAs, highlighting their target users and key differences. Some ISAs offer higher maximum allowances, while others allow for safe, risk-free savings, in contrast to options that may involve some risk. However, this table only scratches the surface, and there are many details it doesn’t cover. For more in-depth information, click the links to learn about each ISA type in detail…

How the different types of ISA compare

(1) If your child is aged 0-15, you will need to open the junior ISA for them. If they’re 16 or 17, they can open it themselves.

The five different ISA types explained

This section outlines the key characteristics of each of the five ISA types and provides links to our detailed guides. You can scroll down to continue or use these links to jump directly to the section that interests you most:

• Cash ISAs
• Stocks & Shares ISAs
• Lifetime ISAs
• Innovative Finance ISAs
• Junior ISAs

Cash ISAs – risk-free, tax-free savings

Opting for a standard savings account means that if you have significant savings, you might be required to pay tax on the interest earned once you exceed your personal savings allowance (£1,000 in interest for basic-rate taxpayers and £500 for higher-rate taxpayers).

However, with a cash ISA, you are completely exempt from paying tax on the interest earned. Additionally, the interest accrued in a cash ISA does not contribute to your personal savings allowance, allowing you to safeguard more of your interest if your earnings are substantial.

Similar to regular savings accounts, cash ISAs come in various forms…

• Easy-access cash ISAs. These accounts function exactly as described—you deposit your money and can access it at any time without incurring any penalties.
• Notice cash ISAs. In this case, you are required to provide a specified notice period before withdrawing your funds. These accounts are ideal if you might need access to your money but can afford to wait.
• Fixed rate cash ISAs. Fixed-rate ISAs typically provide higher interest rates compared to easy-access or notice ISAs. However, if you need to withdraw your funds before the term ends, you’ll likely face a penalty that reduces the interest earned.
• Help to Buy ISAs (no longer available to new applicants). These ISAs were created to assist first-time homebuyers in climbing the property ladder by offering a 25% government bonus, capped at £3,000. While it’s no longer possible to open a new account, you can still transfer an existing one to a different provider. For comprehensive information, refer to Top Help to Buy ISAs.

Is a cash ISA worth it?

The Personal Savings Allowance (PSA) ensures that interest on savings is tax-free up to a certain limit. Individuals paying the basic 20% income tax rate can earn up to £1,000 in interest annually without incurring any tax. For those in the higher 40% tax bracket, the tax-free threshold drops to £500, while top-rate taxpayers at 45% will always be subject to tax on their savings interest.

Currently, with interest rates being quite high, many people who are not utilizing cash ISAs are unnecessarily paying tax on their savings interest. To start incurring tax on interest, a basic rate taxpayer would need to have approximately £20,000 in a top easy-access savings account.

However, if you’re not close to reaching your PSA limit, it may be more beneficial to focus on obtaining the highest interest rate available. Generally, regular savings accounts offer better rates compared to ISAs. For more detailed information, refer to our Cash ISA guide.

Savings up to £85,000 per person per financial institution are safe in a cash ISA

The protection for savings in cash ISAs is equivalent to that of traditional savings accounts. As long as your funds are held in an account with a UK-regulated bank or building society, they are safeguarded up to £85,000 by the Financial Services Compensation Scheme.

Although this overview seems straightforward, the regulations governing it are more intricate. For comprehensive details, refer to the thorough “Are Your Savings Safe?” guide.

For full details of how cash ISAs work and the top-pick accounts, read our Cash ISA guide.

Stocks & shares ISAs – tax-free investments, though watch for fees

You can also utilize your ISA allowance for investing through a stocks & shares ISA. This account allows you to invest in various assets, such as funds (which pool shares or bonds from different companies), bonds (essentially loans to companies or governments), and individual company shares.

It’s important to keep in mind that investing always carries some level of risk. The value of your investments can fluctuate, meaning they can decrease as well as increase, depending on the performance of your chosen funds, bonds, and shares. Generally, investing in this way is considered a long-term strategy, and it’s advisable to commit your money for at least five years to help mitigate the effects of market volatility.

Additionally, be aware that stocks & shares ISAs typically involve several fees, including:

• Platform charge. You can choose between a flat fee, which is ideal if you plan to invest a significant amount, or a percentage of your funds’ value, which is beneficial initially but becomes more expensive as your investment grows.
• Annual management charge. This fee is applied by the current manager of the fund within your stocks and shares ISA. It’s generally expressed as a percentage and usually ranges from 0.1% to over 1% per fund.
• Trading fees. Each transaction involving the purchase or sale of shares or funds incurs a cost. This fee can range from £0 to £25. Therefore, if you are an active trader, prioritizing a low trading charge should be a top consideration.
• Transfer out fee. Transferring your stocks and shares ISA from one provider to another usually incurs a fee, typically ranging from £25 to £50. However, some platforms may not impose this charge.

When you begin investing through a stocks and shares ISA, you might not notice immediate benefits compared to simply using an investment platform without an ISA, given that you already have several tax-free allowances for investing.

However, if you plan to consistently add to your investment over an extended period, it is advantageous to use a stocks and shares ISA. The ISA wrapper provides enduring protection. The benefits of a stocks and shares ISA in comparison to a regular investment account include…

• Exemption from capital gains tax (CGT). This tax applies to the profits you earn when you sell your investments. You benefit from a generous annual allowance of £3,000, allowing you to realize this amount of profit from stocks, shares, or property each year without incurring the tax.

However, if you’ve held investments for an extended period and subsequently sell a substantial amount of shares or funds for a significant gain, you might be impacted by this tax. Therefore, it’s advisable to initiate and maintain your investments through a stocks & shares ISA.

• Exemption from tax on bond interest. If you’re investing in bonds, a stocks & shares ISA will shelter the interest you get from the taxman.
• Exemption from tax on dividend income. Inside an ISA, you don’t pay tax on dividends whether you earn 1p or £10,000. Outside an ISA, you only get a £500 dividend income allowance every year – earn more than this and you’ll pay tax.

Initially, exceeding your dividend allowance is not a common concern when you begin investing. However, if you have progressively increased your investments over time, it may become a factor.

Your savings aren’t protected from losses if you invest in a stocks & shares ISA

Investing money in a stocks & shares ISA by allocating it to funds, shares, or bonds is considered a ‘risk-based investment’ rather than a savings account. This means that if the investments underperform, you could end up losing money, potentially even the entire amount you invested. There is no inherent protection against such losses.

That said, the Financial Services Compensation Scheme (FSCS) does offer some protection, but this is limited to situations where you lose money because the investment provider goes bankrupt. For instance, if you hold a stocks & shares ISA with a bank and that bank fails, you might be eligible for compensation.

However, if you’re purchasing shares or funds through a provider that merely acts as an intermediary—meaning they don’t own the funds themselves—the provider’s failure won’t impact your investment directly. In such cases, you still own the shares or remain invested in the funds, and no compensation would be available from the FSCS.

Lifetime ISAs – a 25% boost if saving for first home or retirement

Lifetime ISAs were introduced in 2017 to support individuals in saving for their initial home purchase or retirement.

These ISAs are somewhat unique compared to others, as they have a £4,000 annual contribution limit. In contrast, you can invest up to £20,000 each tax year into a cash ISA, a stocks & shares ISA, or an innovative finance ISA. The Lifetime ISA restricts you to £4,000 annually. There are two varieties of Lifetime ISAs:

• Cash Lifetime ISAs. If you’re setting aside funds for your first home and aim to make a purchase in the next few years, this option could be ideal. It provides a clear understanding of your available funds and eliminates any risk to your savings.
• Stocks & shares Lifetime ISA. When investing, it’s crucial to adopt a long-term perspective to weather any fluctuations in the stock markets. This approach is especially advisable if you’re saving for retirement or if purchasing your first home is still a distant goal and you’re willing to accept some short-term risks to your capital.

You have the option to either deposit £4,000 as a one-time payment or contribute cash gradually. Each month that you save, the state will add a 25% bonus. For example, if you save £1,000, you’ll end up with £1,250. If you manage to save the full £4,000 in a year, the bonus will increase it to £5,000. This amount does not include any interest or investment growth. Here’s what you need to know…

• You can only open one if you’re aged 18-39. Once you hit your 40th birthday, you can pay in till you’re 50, but you won’t be able to open a new account (except to transfer).
• You can only withdraw cash if you’re buying your first home or you’re 60 or over. Withdraw at any other time and you face a penalty of 25% (so effectively an overall loss of over 6%).

If you’ve reached the £4,000 limit in your Lifetime ISA for a given tax year and still have additional funds to invest, you have the option to contribute to one or more other types of ISAs listed in this guide. Just keep in mind that the total contribution limit for these additional ISAs is £16,000 within the same tax year.

Your savings are safe in a cash LISA, though they’re at risk in a stocks & shares LISA

Choosing a cash Lifetime ISA means your savings are safeguarded just like they would be in a standard cash ISA. However, if you decide on a stocks & shares LISA, your investments won’t be shielded from potential losses. For more details on the protection of stocks & shares ISAs, see additional information here.

For full information on how Lifetime ISAs work, see our LISA guide.

Innovative finance ISAs – lend to others and get interest tax-free

Investing in an innovative finance ISA (IFISA) allows you to channel your funds into loans for borrowers or businesses through a process commonly referred to as peer-to-peer lending. Below are the essential points you should be aware of…

• You get interest for lending your money out. The concept involves receiving a portion of the interest charged to the borrower on their loan. Typically, you won’t receive the full interest rate since the ISA provider will retain a share.
• Lending through an IFISA means your interest isn’t taxed. You can lend money without using an ISA wrapper, but if you choose to open an ISA, any interest you earn from lending to individuals or companies will be tax-free.
• You may lose money if the people you’ve lent to can’t repay. When you lend money, there’s always a possibility that the borrower might not repay. You can reduce this risk by distributing your funds across various loans or utilizing safety nets provided by the lending platform. Nonetheless, if a large number of your borrowers default, your savings could face a substantial impact.
• It can take a while to get your money back if you want to withdraw. Typically, you must wait for other investors to be available to purchase your loan from you. This process can be swift, particularly in a strong economy. However, the coronavirus pandemic demonstrated that many peer-to-peer investors faced delays of several months while attempting to sell their loans.

Your savings aren’t protected in an innovative finance ISA

When you invest money through an innovative finance ISA (IFISA) with a provider that lends to borrowers, your funds are not protected. Although some IFISA providers may have a safeguard fund to help offset potential losses, this is not a requirement for them.

Even for those that do have such a fund, it’s improbable that it will be sufficient to cover all losses if there were a major economic downturn causing a widespread inability to repay loans. Therefore, if you’re considering investing in an IFISA, it’s wise to invest only an amount you can afford to lose in the event of adverse outcomes.

Junior ISAs – save for your child’s future

A Junior ISA (JISA) is a child-friendly version of the standard ISA, designed to help you save or invest money on behalf of a child without incurring taxes. Much like its adult counterpart, a JISA offers tax-free savings opportunities, whether you choose to save, invest, or combine both approaches. To sum up…

• You can save up to £9,000 a year (for 2024/25) into a JISA. This amount represents less than half of the adult ISA limit; however, it is distinct from the adult ISA allowance. Consequently, you can contribute up to £20,000 to your own ISA while also placing £9,000 into your child’s junior ISA within the same tax year.
• You can divide the annual JISA allowance between cash JISAs and stocks & shares JISAs. So you can put it all in cash or all in stocks & shares (or any mix of the two).
• Children can’t touch the money until they turn 18. The account is set up under the child’s name, yet you are responsible for its management. The child gains control of the account at age 16, but access to the funds is restricted until they turn 18. At that point, the money becomes entirely theirs, not yours.

Even if you intended to set it aside for their college expenses or a down payment on their first house, there’s a chance they might choose to spend it all on partying, and there would be nothing you could do to prevent it.

• Your child can only hold a cash JISA with one provider. The process is quite similar for a stocks and shares Junior ISA. This implies that you add funds with the same provider annually. If you’re dissatisfied with your current provider or find a more advantageous offer elsewhere, you have the option to transfer your child’s Junior ISA to a different company. However, it’s important to note that the entire account must be transferred in one go.

What to do if your child has a Child Trust Fund…

Child Trust Funds (CTFs), which preceded junior ISAs, were introduced for children born from September 2002 to January 2011.

You can now transfer a Child Trust Fund into a junior ISA account. This transfer is usually the best option, but it may not be ideal for everyone. To determine if this transfer is suitable for you, consult our guide on Child Trust Funds.

Your savings are safe in a cash JISA, though they’re at risk in a stocks & shares JISA

If you select a cash junior ISA, your savings are safeguarded just like they would be with a standard cash ISA. However, if you go for a stocks & shares junior ISA, you won’t have protection against potential investment losses. Learn more about the protection provided for stocks & shares ISAs.

For full information on JISAs, see our Junior ISA guide.

You can move your ISA to a new provider, but don’t withdraw the cash yourself to do the transfer

You are free to switch between providers of the same ISA type to secure a better rate. This practice is crucial, particularly with cash ISAs, to ensure you consistently receive the best returns.

Moreover, you have the option to switch among the three primary ISA categories—cash ISAs, stocks & shares ISAs, and innovative finance ISAs—if your saving or investing goals shift. However, transferring an ISA is more complex than moving a regular savings account.

To ensure a seamless transfer, just follow our key ISA transfer guideline:

Never withdraw the money yourself if you’re transferring! You’ll immediately lose all the tax benefits.

Instead, reach out to the new provider and complete a transfer form. Your new provider will handle the entire process, including reaching out to your current provider and transferring the funds for you.

Additionally, you have the option to transfer previous years’ ISA savings as well. This can be particularly beneficial if you have multiple ISAs from earlier tax years and wish to consolidate them into a single, manageable account.

Watch out for fees and interest penalties

You may need to pay these on some products to leave your current provider. They’re most common on:

• Fixed cash ISAs. If you decide to transfer before the end of the fixed term, you’ll incur an interest penalty ranging from 30 to 365 days’ worth. Nevertheless, if the fixed term has already concluded, no such fee should apply.
• Stocks & shares ISAs (including stocks & shares versions of the Lifetime ISA and Junior ISA). Usually S&S ISAs have exit fees, usually around £25-£30. If you’re looking to transfer all your assets ‘in-specie’—meaning moving the same investments to a different ISA provider—you’ll probably incur a fee for each fund being transferred. Typically, it’s more straightforward to liquidate your investments and transfer the funds as cash, then reinvest with your new provider.
• Innovative Finance ISAs. Typically, your investments will be in real estate or loans. Generally, you have the option to sell your investment at any time (though it’s important to confirm this, especially with property IFISAs), but be aware that there might be a fee or an interest penalty for exiting early. Alternatively, you may need to wait until another buyer is interested in purchasing your investment.

Not all ISA providers will accept transfers of previous years’ allowances. We tell you which ones do in our various ISA guides (Top cash ISAs, Stocks & Shares ISAs, Lifetime ISAs, Peer-to-peer Lending and Junior ISAs). A cash ISA transfer should take no more than 15 business days. Stocks & shares ISAs shouldn’t take more than 30 days.

You can usually withdraw cash from an ISA at any time

If the specific rules of your individual product permit it (and many do), you can immediately access the funds you wish to withdraw while preserving the tax advantages on the remaining savings within your ISA. Here’s a breakdown of how withdrawals function across the five different types of ISAs:

• Cash ISAs. If the ISAs are easy access, you can withdraw funds whenever you like. For fixed ISAs, while you can still take out money, doing so typically incurs an interest penalty on the amount you withdraw.
• Stocks & shares ISAs. To access the amount you wish to withdraw, you’ll need to liquidate funds, bonds, or shares. The cash will be provided to you after these sales are completed. Please allow a few days for the transactions to be processed.
• Innovative finance ISAs. This situation can be somewhat intricate since you’ll probably need to liquidate your investments to access the funds. Many providers offer markets where other buyers can purchase your share, allowing you to access your cash. However, it could become more challenging if there’s a higher number of sellers compared to buyers. Review the specifics of your IFISA to understand the process for making withdrawals.
• Lifetime ISAs. You can make a penalty-free withdrawal if you’re purchasing your initial home or are aged 60 or older. Otherwise, you’ll incur a penalty to access your funds, which amounts to the removal of the 25% bonus.
• Junior ISAs. The funds remain inaccessible until your child reaches the age of 18. The sole exceptions occur in unfortunate circumstances, such as if the child is diagnosed with a terminal illness or if the child passes away.

If you withdraw, you can’t replace the cash in your ISA later on

Your annual ISA limit of £20,000 pertains to the amount you can contribute, acting as a contribution cap. Generally, you cannot exceed this limit by withdrawing and then redepositing funds. Here’s a clearer example to illustrate:

Imagine you deposit £20,000 into a stocks and shares ISA at the beginning of the tax year in April. By June, you find yourself needing £2,000 for a new boiler because your old one broke down. You can liquidate £2,000 worth of your investments and take that amount out as cash, leaving the remaining £18,000 invested in your ISA. However, even though you’ve withdrawn £2,000, you won’t be able to re-contribute that amount later in the year, as your ISA limit for the tax year is already fully utilized.

Flexible cash ISAs – the notable exception…

While only a few banks provide this feature, a flexible cash ISA allows you to withdraw funds and later reinvest them into the same account within the same tax year without impacting your allowance. For comprehensive information, check out our Flexible ISA guide.