Opening an ISA can be a daunting task. For those with money saved up, putting savings away in an alien account can feel like a big step. But the tax wrapper is one of the most efficient ways savers can grow their money without incurring taxes and penalties.
Below, Sarah Coles, head of personal finance at Hargreaves Lansdown, breaks down all savers need to know.
The different types of ISA
There are several options available to savers at present, making the choice a difficult one, but the most common are cash ISAs and stocks-and-shares ISAs.
The former is essentially a savings account, while the latter allows people to hold a range of funds and shares on an investment platform.
A junior ISA (available in both cash and stocks and shares options) are for children under the age of 18. It allows parents and grandparents to save up cash for their kids’ future, with money tied up until the child turns 18. It is managed by a parent or guardian, but anyone can pay into it.
There are also ISAs for specific purposes, such as the help-to-buy ISA. This is now closed to new entrants, but people who have one can continue paying into it until November 2029. It is essentially a cash ISA designed to help first-time buyers save for a deposit, although only on homes up to £250,000 (or £450,000 in London).
“When you buy a property, the government adds a 25% bonus. If you withdraw the cash for any other reason, there’s no bonus,” she said.
The lifetime ISA (LISA) is a more flexible version of the above. Those aged 18-39 can open a LISA and the government will top up contributions – up to £4,000 a year – by 25%.
“You can use it to buy your first home worth up to £450,000 (although you must hold the account for at least a year before you do this),” said Coles, or the money can be withdrawn once the account holder turns 60.
If money is withdrawn for any other reason, there will be a penalty, although the government is consulting on a replacement ISA product for first-time buyers.
The final option is the innovative finance ISA, where people can invest in peer-to-peer loans, although this “tends to be niche”.
The taxes you save on
ISAs protect from a range of different taxes. Cash ISAs make interest earned exempt from income tax. Any interest accrued outside the wrapper is tax-free up to £1,000 for basic rate taxpayers and £500 for higher rate taxpayers, with no allowance for additional-rate payers.
For investors, capital gains (CGT) and dividend taxes are both avoided. Otherwise, people will pay tax on dividend income above £500, while CGT is applied on gains made above £3,000.
Although children do not tend to pay tax, if they earn more than £100 in interest or dividends, this is added to the parents’ tax bill, so a junior ISA protects against this.
Can you have more than one ISA and what are the allowances?
“You can pay into as many different ISAs as you like each tax year,” said Coles. “You can hold a mixture of stocks and shares and cash ISAs, several cash ISAs, several stocks and shares ISAs, any number of Innovative Finance ISAs, and all of these alongside a Lifetime ISA (assuming you qualify for one). You can only pay into one Lifetime ISA each tax year, though.”
At present, the total allowance is £20,000, which can be split across cash, stocks and shares and innovative finance options.
As part of this, savers can also put up to £4,000 into a LISA or £200 per month into a help-to-buy ISA (or both, although Coles said this is not recommended as savers only get the bonus from one), topping up the remaining allowance in other ISA accounts.
Junior ISAs have their own £9,000 allowance.
Upcoming changes to be aware of
From April 2027, the rules on cash ISAs will change. Those under the age of 65 can only put £12,000 a year into their cash ISA, with the rest of the allowance ringfenced for stocks and shares. Those aged 65 and over will still be able to put the full £20,000 into cash.
“The rules on transfers will also change, so those under the age of 65 will no longer be able to transfer from stocks and shares ISAs to cash ISAs,” said Coles.
“The government is currently consulting on the rules that will apply if people choose to derisk by holding cash in a stocks and shares ISA, or cash-like assets. The final rules will depend on the outcome of the consultation. In the interim, there’s still a chance to use your full £20,000 cash ISA allowance in this tax year and the next one.”
Meanwhile, from April 2026, dividend tax is to rise by 2 percentage points for basic and higher tax rates, making the tax savings from an ISA “even more valuable”.