Individual Savings Accounts

Minimising the amount of tax you pay on your investment returns

Individual Savings Accounts (ISAs) are a ‘tax-efficient wrapper’ enabling you to minimise the amount of tax you pay on your investment returns. Some ISAs give you instant access to your money and can be used to plan your finances for the short term.

On the other hand, if you have longer-term savings goals, you can invest in an ISA for your future. In the current 2022/23 tax year, you can put £20,000 into your tax-efficient ISA before the end of the financial year on 5 April. The current tax year started on 6 April 2022 and ends on 5 April 2023.

ISA options

Cash ISA
If you are a UK resident over the age of 18 (age 16 for a Cash ISA only), you can open one of each type of ISA in a tax year, providing you don’t exceed the annual allowance. Cash ISAs are suitable for your short-term savings goals as they don’t invest in the stock market but with current low interest rates, your savings won’t grow much, and you might not be keeping up with inflation. You might consider a Cash ISA as your ‘emergency’ pot of money for any unexpected expenses or a last-minute holiday.

Stocks & Shares ISA
This is a tax-efficient investment that allows you to invest your money in shares, government bonds (gilts) and property with peace of mind that you won’t pay any Capital Gains Tax or Income Tax on the proceeds. This type of ISA is more suitable for your longer-term goals as it has the potential to out-perform Cash ISAs over the medium to long term, but with varying levels of risk.

The three main factors to consider when choosing between a Cash ISA and a Stocks & Shares ISA are the length of time you’ll be saving or investing, your appetite for investment risk and the impact of inflation over time.

Innovative Finance ISA
This is a type of investment account that allows you to lend your money through peer-to-peer lending platforms to receive tax-efficient interest and capital gains. You could be lending money to serve personal loans, small business loans or property loans, or a combination of these.

Interest rates can often be much more attractive than Cash ISA rates, but peer-to-peer lending is a higher-risk form of investing and your capital is entirely at risk as there is no protection from the Financial Services Compensation Scheme (FSCS).

Lifetime ISA
If you are aged 18 to 39, and are looking to save for your first home or for later life, you could consider a Lifetime ISA. You can hold cash in a Lifetime ISA or choose to invest it just as you would with a Stocks & Shares ISA. You can put in up to £4,000 each year up to and including the day before your 50th birthday but remember that this £4,000 allowance contributes to your full annual ISA allowance.

The government will pay a 25% bonus on your contributions (£1 for every £4 you put in), up to a maximum of £1,000 a year, but you must be aware that a charge of 25% will be applied to any withdrawal if it is for any reason other than buying your first home, at age 60 or if you are terminally ill.

The amount you pay in is linked to your annual ISA allowance (£20,000 for 2022/23). For example, if you pay £1,000 into your Lifetime ISA, you can still pay £19,000 into other ISA products.

Junior ISA
A Cash or Stocks & Shares ISA account, or both, can be opened for a child subject to the annual allowance, which is £9,000 for the 2022/23 tax year.
The account must be opened by the child’s parent or guardian but anyone can contribute once the account has been opened. Savings in a Junior ISA account cannot be withdrawn until the child reaches age 18.