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What Is an ISA UK: Everything You Need to Know in 2022

Written by, Marija Petkova

Updated April, 18, 2022

An ISA is a type of savings account that offers tax-free returns on your deposited funds. 

This way, you can significantly grow your savings over time making ISAs a popular choice for many savers.

Read on as we explore everything you need to know about ISAs, including what is an ISA UK, how they work and the benefits and risks involved.

What is an ISA?

An ISA (Individual Savings Account) is a type of savings account that lets you invest or save money without having to pay income or capital gains tax on your returns. 

You can open an ISA account with most banks, building societies, investment firms, crowdfunding companies and other financial institutions.

How does an ISA Account UK work?

ISAs come with only one restriction. There is an annual limit on the amount of money you are allowed to save in each account every financial year, or from 6 April to 5 April. Known as the ISA allowance, this limit is set by the government and changes each tax year.

For the 2022/2023 tax year, the ISA allowance is £20,000.

This means that each year you have until 23:59 on 5 April to add money to your ISAs. The allowance from the previous year does not carry over.

Note: The maximum allowance does not apply to just one ISA. You can split it up and invest in different types of ISAs (if you have more than one). Just make sure you do not exceed the ISA allowance for that financial year. 

Different Types of ISAs

There are different types of ISA accounts to suit different needs, although according to average UK saving statistics, Cash and Stock and Shares ISAs are the most popular. 

Here are the four types of ISAs you can invest in:

Cash ISAs  

A Cash ISA is just like a normal savings account, except you don’t have to declare gains on your annual tax return.

This is the most common type of ISA and one of the best and most stable ways to save your money. 

There are three principal types of Cash ISAs:

  • Easy access ISA lets you access your money whenever you need it without getting penalised (although some accounts restrict you to a specific number a year). These typically come with variable interest rates.
  • Regular saver ISA usually pays a fixed rate of interest over a certain period of time, provided you make regular payments each month. You can’t withdraw any money during that time, though. 
  • Fixed-rate cash ISAs keep your money locked for one to five years, giving you a fixed interest rate over the time period. The longer the term, the more you can save. Interest rates are higher than the easy access ISAs, but you won’t be able to withdraw any money from your account during the term.

Cash ISAs can be a great short-term way to save money, but there are some downsides to consider. The main one is that the interest rates on cash ISAs are typically lower than those on other types of savings accounts. So, if you’re looking for a high return, a Cash ISA may not be the best option.

Who can open a Cash ISA?

Cash ISAs can be opened by anyone over the age of 16.

How much can you save each year?

The maximum allowance for a Cash ISA in 2022/2023 is £20,000.

Stocks and Shares ISAs 

A Stocks and Shares ISA, or investment ISA, lets you invest your money in stocks, shares, and other securities. This allows you to grow your savings gradually, as the value of these investments typically increases over time. It also means that you can invest your money without paying income or capital gains tax on your returns. 

Although there is more potential to increase your savings with a Stocks and Shares ISA (the average return rate is 5.14%) there is also quite a lot of risk at play. The value of your investment can go down as well as up, so you could end up losing money. 

The money you put into a Stocks and Shares ISAs can be withdrawn at any time, although this is not advisable. These types of ISAs work best for long-term investments, or at least a 5 year period to let interest build up over time. 

Who can open a Stocks and Shares ISA?

Anyone over the age of 18 can open a Stocks and Shares ISA.

How much can you save each year?

The maximum allowance for a Stocks and Shares ISA in 2022/2023 is £20,000.

Lifetime ISAs 

A Lifetime ISA was created to help people buy their first home or save the money you need for a comfortable retirement. You can put in up to £4,000 a year, and the government will give you a bonus of 25% on whatever you save, up to a total of £1,000 a year. This means that if you save the full £4,000 each year, the government will give you an extra £1,000.

The UK has strict ISA rules when it comes to withdrawing money from these accounts. You can only take out money if you are buying your first home (up to a £450,000 purchase price) or until you are 60 (if you are saving for retirement). 

If you want to take money out of your Lifetime ISA for any other reason, you will have to pay a charge of 25% on the amount you withdraw. This means you could end up getting less than what you initially deposited into the Lifetime ISA.

Still, this type of ISA can help you build a nice nest egg for your retirement, particularly if you are in the 35% of Brits who don’t have a pension.

Note: If you are saving for retirement, you can only make payments into the account until you are 50 and then wait ten more years to withdraw it.

Who can open a Lifetime ISA?

Anyone between the ages of 18 and 39 can open a Lifetime ISA.

How much can you save each year?

The maximum allowance for a Lifetime ISA in 2022/2023 is £4,000.

Junior ISAs

A Junior ISA is meant for children under the age of 18. Parents or guardians can open the account and make the investment decisions, but the ISA will be in the child’s name. 

When they turn 18, they can withdraw the money, but children can take control of their account when they turn 16. Money cannot be taken from a Junior ISA until that time, except under special circumstances.

A Junior ISA is an excellent way to invest in your child’s future. The money can be used to pay for their education, their first property or any other expenses they may have. That said, this is still an investment, and there are risks involved.

Who can open a Junior ISA?

Parents or guardians can open a Junior ISA for children under the age of 18.

How much can you save each year?

The maximum allowance for a Junior ISA in 2022/2023 is £9,000. Contributions to JISAs will not affect your personal ISA allowance.

Innovative Finance ISAs

An Innovative Finance ISA, or peer-to-peer ISA, enables you to invest your money in loans to individuals or businesses.

An IFISA lets you use your ISA allowance to lend funds to other investors, typically individuals, businesses or property developers, through the Peer-to-Peer lending market. As with other types of ISA, you will not pay UK income and capital gains tax on your money.

The interest rate is determined by the borrower, and in general the higher the interest rate, the more risky the investment is. If this is too much of a gamble, we suggest looking into investments that come with lower risks involved. 

Who can open an Innovative Finance ISA?

Anyone over the age of 18 can open an Innovative Finance ISA.

How much can you save each year?

The maximum allowance for an Innovative Finance ISA in 2022/2023 is £20,000.

What else do you need to know about an ISA and its benefits in the UK? We will answer the most common questions. 

Note: For a full overview of the pros and cons involved in saving into an ISA, be sure to read this article

Can you withdraw money from your ISA and put it back later?

Yes, but this depends on the type of ISA you have, i.e. whether it is flexible or not.

If you have a flexible ISA, you can withdraw money and put it back in the same tax year. Your allowance will not be affected. You can also withdraw money from previous years, but you have to return these by the end of the financial year (i.e. until April 5 2023).

If your ISA is not flexible, any money you withdraw will count towards your ISA allowance

Do you need a huge sum to open an ISA in the UK?

No, you can open an ISA with just one pound. 

Note: Stocks and Shares ISAs have different minimum requirements set by your provider. 

Can you transfer an ISA?

Yes, you can transfer an ISA to another provider into a different type of ISA account or the same type of account. 

Note: If you want to transfer the money you invested in that tax year, you have to transfer all of it. For money you deposited in previous years, you are not limited on how much you can transfer, i.e. you can transfer part or all of your savings. 

What happens to your ISA when you die?

Your ISA will end when your executor closes the account or when the administration of your estate is finalised. Otherwise, the ISA will be closed by the provider three years and one day after your death. The money in your account is not subject to tax until that date; however, inheritance tax requires that your ISA investment be included in your estate. 

Suppose you have Stocks and Shares ISAs. In that case, your provider will sell the investments and pay the funds to your beneficiary or transfer the investments to your surviving spouse or civil partner, but only if they have an ISA with the same provider. 

Can you have more than one ISA?

As long as you do not exceed the yearly maximum amount for each type of ISA, you can have as many accounts as you like. 

Note: You can’t invest your money in more than one cash ISA per tax year. For example, you could put £10,000 in a Cash ISA and £10,000 in a Stocks and Shares ISAs, but not in two Cash ISAs.

Bottom Line

An ISA is a great way to save for your future, and there are many different types of ISAs available. 

In this article, we’ve outlined the most common types and answered the most important questions, starting from what is an ISA UK to how it works. 

That said, you should always consult an expert to find the best option for your needs.