An Individual Savings Account – also called ISA – is a tax-free savings and investment product available to UK residents. ISAs were introduced in 1999 as a replacement for Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs). The key feature of an ISA is that the interest or profits earned on the account are not subject to income tax or Capital Gains tax. This makes ISAs an attractive option for those looking to save or invest their money in a tax-efficient manner. 

Types of ISAs

There are several different types of ISAs available in the United Kingdom, each with its own specific features. These include:

• Cash ISA: A Cash ISA is a savings account that allow the holder to deposit money and earn interest on it, without having to pay tax on the interest earned. Cash ISAs are often used as a tax-efficient alternative to traditional savings accounts.
• Stocks and Shares ISA: A Stocks and Shares ISA is an investment account that allows individuals to invest in the stock market tax-free. The money invested in a Stocks and Shares ISA can be used to purchase shares in a wide range of companies, funds, and other securities. The value of the investments held within a Stocks and Shares ISA can go up or down, so it is important to remember that it carries risks. This type of ISA is suitable for those with a higher risk appetite and a longer-term investment horizon.
• Lifetime ISA: A Lifetime ISA is a long-term savings and investment account that is available to UK residents aged 18 to 39. Contributions to a Lifetime ISA receive a 25% government bonus, up to a maximum of £ 1,000 per year. The funds in a Lifetime ISA can be used to purchase a first home or as a retirement savings account. 
• Innovative Finance ISA: An Innovative Finance ISA is a newer type of ISA, introduced in 2016. It allows individuals to invest in peer-to-peer (P2P) loans and other alternative investments. This type of ISA is suitable for those who are looking for an alternative to traditional savings accounts and who are willing to take the risk associated with peer-to-peer lending. 

Contribution limits and restrictions

One of the main limitations of ISAs is the contribution limit, which is the maximum amount of money that can be deposited in an ISA each tax year. The ISA annual allowance for the 2022/2023 tax year is £ 20,000. It is important to note that this limit applies to the total amount deposited in all of your ISAs, not just one account.

Another important feature to be aware of is the type of ISA that can be opened. UK residents are allowed to open one of each type of ISA in a tax year.

Transferring ISAs

If you have an ISA with one provider and want to switch to another, you can transfer your ISA without affecting your contribution limit. This is known as an ISA transfer; however it is important to note that some ISA providers may charge a transfer fee.

It is also possible to transfer ISAs between different types, such as from a Cash ISA to a Stocks and Shares ISA. However, it is important to carefully consider the risks and potential rewards of different ISA types before taking a decision.