06 Apr 2024

Types of ISA

An Individual Savings Account, or ISA, is a tax-efficient way of saving. But not everyone has the same savings goals, or wants to save in the same way.

So there are four different types of ISA most people can choose from – not just (as many think) three types of ISA.

We’re going to help you understand each of them, and explain the differences between them.

That’ll help you decide on the best one for you.

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Different types of ISA

You can choose between:

And if you want to save on behalf of a child or a child that you have parental responsibility for that's under 18, you can take out a junior cash or stocks and shares ISA for them. If they're 16 or over they can open a cash junior ISA themselves.

With all ISA types, you can:

  • save into different types of ISA at the same time. 
  • invest up to £20,000 a year into your ISA or ISAs. You don’t pay income or capital gains tax on any profits you make from them (although the tax treatment on savings and investments depends on your individual circumstances, and may change in the future).

To set an ISA up you have to be:

  • a UK resident
  • or if you’re not a UK resident:
    • a Crown servant (for example you might be on diplomatic or overseas civil service) or
    • the spouse or civil partner of a Crown servant

You can’t share an ISA or set one up on behalf of another adult, unless you hold Lasting Power of Attorney, though you may be able to open a junior ISA for a child aged under 18.

There are also some very important differences between ISAs. Understanding those differences will help you decide which type of ISA might be right for you.

Stocks and shares ISA

A stocks and shares ISA lets you put your money into several different types of investment without having to pay tax on any income or growth. With one, you can invest in:

  • company shares
  • unit trusts and investment funds
  • corporate bonds
  • government bonds.

Different providers wrap stocks and shares ISAs around different combinations of those. You’ll need to shop around to find the right one for you.

You may be worried about how to protect your savings from inflation. If you’re thinking about investing in the stock market, you’re probably aiming to get better returns than you are on a savings account. If you are, then you should be prepared to invest your money for at least five years. You might get back less than you put in, though.

A stocks and shares ISA could be right for you if you’re:

  • looking for a simple investment that:
    • gives tax-free growth
    • has the potential to outperform cash savings
  • planning to keep your money invested for the longer term
  • aged 18 or over.

We only offer a Stocks and Shares ISA. Our Stocks and Shares ISA page will tell you more about our product. And if you’re new to investments, our Investing for beginners page will take you through the basics.

As with any investment, the value of your stocks and shares ISA could go down as well as up, so you might get back less money than you invest.

Want to learn more about investing?

We know that many people are nervous about investing. In our article, we look at what you should consider before taking that first step.

Cash ISA

A cash ISA is a tax-efficient savings account. As with any savings account, you put money into it and leave it there to earn interest for you. That interest will be tax-free.

But standard savings accounts might give you higher interest rates and more flexibility. And you have to earn at least £1,000 of interest in a tax year before you'll pay any tax on it (or £500 if you’re a higher rate taxpayer).

A cash ISA could be right for you if you’re:

  • looking for a low-risk savings account, although the returns may be lower than inflation
  • wanting your savings to be in a tax-free account
  • aged 18 or over.

Innovative finance ISA

An innovative finance ISA (or IFISA) lets you invest tax-free in:

  • peer-to-peer loans, when you lend to other people or businesses without using a bank
  • crowdfunding debentures, when you invest in a business by buying its debt.

IFISAs are still a niche product – most people choose stocks and shares or cash ISAs.

As with a stocks and shares ISA, an IFISA might perform better than cash savings. But its value could also go down. And there’s one big difference between them. If whoever you’ve lent to goes bust, the Financial Services Compensation Scheme (FSCS) doesn’t cover your investment. You might lose it all.

An IFISA could be right for you if you’re:

  • looking for a simple, non-traditional investment that:
    • gives tax-free growth
    • has the potential to outperform cash savings
  • aware that you might lose some or all of your investment
  • planning to keep your money invested for the longer term
  • aged 18 or over.

Lifetime ISA

If you’re saving for a first home that will cost less than £450,000, a Lifetime ISA could be a good choice. You can put up to £4,000 a year into one – and the government will add 25% to everything you save. Depending on the LISA you choose, you can save cash or invest in stocks and shares.

A Lifetime ISA could be right for you if you:

  • are planning how you’ll buy your first home
  • want to get a savings top-up from the government
  • are aged between 18 and 39.

Junior ISA

A child aged 16 or over can open a cash junior ISA. If you’re the parent or guardian of a child aged under 18 you can open up a junior cash and/or stocks and shares ISA for them. Anyone can then pay into it, up to £9,000 per tax year. You’ll manage the account until they’re at least 16, and once they turn 18 it will automatically turn into an ISA. They can then choose to keep the money invested or they can start withdrawing it.

A junior ISA could be right for you and your child if:

  • you and others close to them want to save or invest for their future
  • you’d like to help them learn about savings and investments.

What’s next?

We’ve shared basic details of all the different types of ISA. Now it’s over to you to:

  • Think through your savings goals. How much do you think you’ll be saving, for how long and for what purpose? That’ll help you work out which ISA is best for you.
  • If you haven’t checked it out already, take a look at our Investing for beginners article. It’ll help you get to grips with the investment basics.
  • For some free and impartial financial guidance, visit MoneyHelper. It’s a government-backed service that’ll help you understand and think through your options.
  • For general inspiration and money-management tips, listen to our A Little Bit Richer podcast. It’ll help you learn about investing, set realistic financial goals, and hopefully enjoy your money today, too.

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