What is an ISA?

An Individual Savings Account (ISA) is a form of investment arrangement which qualifies for a favourable tax status.

Payments are made into the account via after-tax income (the income you have earned that you have already paid tax on) but there is no income tax or capital gains tax liability on the investment returns (the interest earned).

Due to the advantageous tax rules, there is a limit applied to how much money you can save into an ISA within each tax year.

Different types of ISA

Cash ISA

A Cash ISA holds the money you invest within cash deposits. Deposits of up to £75,000 are protected by the Financial Services Compensation Scheme (FSCS). It is mandatory that money held in a Cash ISA be made available on request within 15 days but it is permitted to incur a penalty on interest paid if this breaches a minimum investment term associated with the ISA product.

Stocks and Shares ISA

Money invested is held with ‘Qualifying Investments’ which are:

  • Cash
  • UCITS authorised funds such as Unit Trusts and Open-Ended Investment Companies
  • Certain Investment Trusts
  • Stocks and Shares traded on one of the many recognised exchanges.
  • Government, Corporate Bonds, debentures and Eurobonds

It is mandatory that that money held in a Stocks and Shares ISA be made available on requests within 30 days but it is permitted to incur a penalty on interest paid if this breaches a minimum investment term associated with the ISA product.

Junior ISA

Junior ISA’s (JISA) were introduced in November 2011 and are used as a savings plan for individuals under the age of 18. A child can open their own account from age 16, otherwise a person with parental responsibility can do it on their behalf.

Like an adult ISA, JISA’s are available in both cash and stocks and shares types. Money cannot be withdrawn until age 18 or in the circumstances of terminal illness or death.

Help to Buy ISA

The government has created a ‘Help to Buy scheme’ which includes an ISA which pays first-time buyers a government bonus of 25%.

These ISA’s are available until 30 November 2019, after which time they will no longer be available for new savers. If you have opened your ISA before that date then you can continue to save into it. You must claim your bonus by 1 December 2030.

Find out more about the Help to Buy ISA.

Structured Deposit Plans

Structured Deposits are term based plans (like a fixed rate bond) with a return which is linked to the performance of an underlying asset (such as the UK stockmarket). They can be held within a variety of ‘wrappers’ such as a Cash ISA.

In simple terms, a structured deposit product can be thought of as a cross between a savings account and an investment in stocks and shares due to the return

How much interest will I earn?

Different ISA’s offer different rates of return. Some offer ‘Fixed’ rates of return which will set out up front how much you will receive on the anniversary of the investment. Others will pay a variable rate which will be determined by the performance of the investment in which your money is held.

Investment Terms

Some ISA products have a ‘minimum investment term’ applied to them which means you will not receive a penalty such as no interest paid if you withdraw your money before the end of the term.