Isa stands for Individual Savings Account, the main factor distinguishing it from a regular savings account being that you don’t have to pay tax on the interest it earns.
You can save up to the £20,000 allowance in an Isa in the current 22-23 tax year to April 5.
The three most popular types of Isa are cash, for saving; stocks and shares, for investing, and the Lifetime Isa, or Lisa, which allows you to save for a first home or retirement.
You can pay into a cash and/or stocks and shares Isa every tax year, within the annual allowance of £20,000. This sum can be spread across different types of Isa – it’s not £20,000 per account – but how you spread your allowance between Isas is up to you, limited to £4,000 in the case of a Lisa.
Cash Isas are the current favourite, with more than three times more people paying into one of these than a stocks and shares Isa. Their tax-free status makes them a useful choice for higher rate taxpayers but it’s worth bearing in mind that the typical Isa interest rate is lower than standard savings rates.
Stocks and shares Isas have offered higher returns long term, so could be a good option if you’re investing for the future. Check the small print for fees – it may be more cost effective to opt for a DIY investing platform where you choose your own investment options.
Lifetime Isas allow under-40s to save up to £4,000 a year until they turn 50, with the Government topping this up by up to £1,000 annually. The money can either be used towards a deposit on a first home or withdrawn after 60 to help fund retirement.
Junior Isas, for under-16s, allow parents to save or invest towards their child’s future. These accounts have a £9,000 allowance which isn’t included in the adult’s £20,000 allowance.
How do I open an Isa?
You can do it online with as little as £1 and you can add small amounts over the year, rather than as a single lump sum. To open a cash Isa you need to be over 16, and for a stocks and shares Isa it’s over 18. For the Lisa, you need to be over 18 but under 40. Parents can open a Junior Isa for their child any time from birth to age 16 and grandparents can contribute to it, too.
How many Isas can I open?
There is no limit to the number of Isas you have as long as you meet the eligibility criteria for each one. However, adults can only pay into one of each type of Isa in each tax year and you can’t pay in more than your annual Isa allowance.
Can I carry over my allowance?
You can’t use any remaining tax allowance from one year for the following year – it’s use it or lose it.
Can I move my money from one Isa to another?
Yes, but the best way is to transfer your Isa, as withdrawing and reinvesting the money will count towards your annual tax-free allowance. There usually aren’t any charges involved but it’s best to check with your provider first.
Can I inherit an Isa?
Anyone whose spouse or civil partner died on or after 3 December 2014 can inherit an extra Isa allowance based on how much they had saved in Isas. This allows them to increase the amount they can save in Isas. Even if your spouse/civil partner left the funds in their Isa to someone else, you’ll still inherit the Isa allowance they’ve built up over the years.
What happens if I pay too much into an Isa?
If you overpay, by accident, let your provider know as soon as possible. However, many providers will let you set a limit so you don’t end up overpaying.