How do ISAs work?

Paying tax on your savings or investments can put a dent in your gains. That’s where Individual Savings Accounts (ISAs) can shine. As they’re tax-efficient, they can be a way to supercharge your savings or investments. With no UK Income Tax or Capital Gains Tax to pay on the money you make, you could reach your target a whole lot quicker.

This guide will get you up to speed with everything you’ll need to know.

There are a few different types of ISA. Whether they’re right for you will depend on how you want to invest, how long you want to tie your money up for, and the level of risk you’re comfortable with.

Stocks and shares ISA

Here, your money can be invested into a range of things like shares, bonds, exchange-traded funds and investment funds. It's a more long-term option than cash ISAs and can potentially provide better returns on your money. 

Many stocks and shares ISAs will let you invest in active or passive investment funds. The difference is this:

• Active funds have a fund manager who makes the investment decisions on your behalf. Their goal is to beat the overall returns of an investment benchmark or index.
• Passive funds track an index like the FTSE 100.  With no fund manager, the fees and charges are generally lower than for active funds.

Both types will invest your money in a range of sectors. So, you won’t need to do the hard work of picking individual investments yourself. You’ll find funds for every type of investment - from lower-risk bonds to higher-risk shares.

Remember, the value of your investments may fall as well as rise – and you may get back less than you have paid in.

For more information on why investments go up and down in value, read our article on how to understand risk.

We have more information on stocks & shares ISAs here.

Cash ISA

If you want to avoid the ups and downs on investing, you can earn interest on your money in cash ISAs without paying any UK Income Tax on it. Many providers offer easy access to your money, so they’re useful if you need it quickly.

Remember inflation will reduce the spending power of your money in a cash ISA.

Innovative finance ISA

This invests your money in peer-to-peer lending and any interest you earn will be free from UK Income Tax. This type of ISA is considered higher risk as there is the possibility of non-payment with business loans.

Lifetime ISA

You can open a lifetime ISA (LISA) if you're aged 18-39 and are saving for your first home or your retirement. For this ISA, you can pay in a maximum of £4000 in a tax year but the government will add a 25% bonus up to £1,000 a year on the money you invest.

You'll pay a penalty if you want to withdraw your money for any reason other than your first home or before the retirement age at the time. So, before you lock that money away, make sure you won’t need it for anything else.

Junior ISA

If you’re a parent or guardian, you can open a junior ISA (JISA) for your children under 18 - with a separate allowance of £9,000 per child. These come as either a cash ISA or stocks and shares ISA. Once you start paying in, that money belongs to the child, but it can’t be taken out until they reach 18. So, it’s a good way to make sure they have a nest egg waiting for them in adulthood.

You can open a Wealthify JISA here.

The age requirements for an ISA depends on which type you want to open.

• You'll need to be 18 years old to open a cash ISA, stocks and shares ISA or innovative finance ISA
• Parents or guardians can open a Junior ISA (JISA) for each child under the age of 18. This can be either a cash ISA or stocks and shares ISA - but a maximum of one of each. Children aged 16 or 17 can also open a JISA for themselves if they don't already have one

You can also transfer an existing ISA or JISA from one provider to another. You’ll need to make sure you follow the transfer process correctly, otherwise you could lose your tax benefits. You may also be charged a fee to move it.  

If you’d like to move an existing cash or stocks and shares ISA to Aviva, you can get the ball rolling here.

For the tax year 2024/2025, the individual ISA allowance is £20,000

With a Junior ISA there’s a separate allowance of £9000 for each child in a tax year. If you’re interested in opening one or more, there’s information on the Wealthify JISA here.

Remember, the total amount you pay into all the ISAs you open, or already hold, must add up to no more than £20,000 each tax year (including £4000 in a LISA). But, you can choose to split your allowance between ISAs.

For example, if you pay into a cash ISA and stocks and shares ISA this tax year, you can't pay in more than £20,000 in total.

You get a new allowance every tax year. But if you don’t use it, you lose it. You can’t carry it forward to the next tax year. For instance, if you still have £10,000 to use by the end of the tax year, then that chunk of your allowance is lost.

Remember, ISA allowances can change. Tax benefits are also subject to change and are dependent on your personal circumstances. The value of your investments can fall as well as rise, and you may get back less than you’ve paid in.

ISAs might seem like they come with a lot of annoying rules, but some are 'flexible'. They make using your allowance easier by letting you take out money and then pay it back – as long as it’s in the same tax year.

For example, if you put £10,000 into an ISA earlier this tax year, and withdraw £3,000 later:

• A flexible ISA will let you put up to £13,000 into your ISA before the end of the tax year. That's the remaining allowance of £10,000 plus the £3,000 you took out.
• With a non-flexible ISA, you'll only be able to put in the remaining allowance of £10,000.

At Aviva we offer a flexible stocks & shares ISA.

While your annual ISA allowance is £20,000, that’s just the upper limit. You can get the benefits of an ISA by paying in a little every month or sticking in any small sums you want to save or invest.

The actual minimum amount depends on which ISA you open, and who your provider is. For example, with our stocks and shares ISA you can start with a minimum lump sum of £500 – or pay in at least £25 a month.