What is an ISA?

An ISA (Individual Savings Account) acts as a tax-free wrapper for your savings or investments, exempting your returns from tax.

But what exactly is an ISA, and how do these accounts work? In this guide, we explain what anISA is, the different types of ISA you can choose, and what you might want to consider when opening an account. We also take a look at some of the alternatives to ISAs, including fixed rate bonds and notice accounts.

An ISA, which stands for Individual Savings Account, is a tax-free savings or investment account. You can save up to a maximum of £20,000 per tax year within the ISA wrapper.,

You can choose from several different types of ISA:

• Cash ISA
• Stocks and shares ISA
• Innovative finance ISA
• Lifetime ISA (LISA)
• Junior ISA (JISA)

The Help to Buy ISA was previously available to help towards first home purchases, but closed to new applicants in 2019. If you already have one, you can save into it until November 2029 and claim your bonus until December 2030.

You can open more than one type of ISA, but your total savings across all of them must not exceed the annual £20,000 limit for all ISAs (excluding a JISA). This allowance applies to you as an individual rather than to each account you open. Depending on your savings goals, you can choose to put your full allowance into one type of ISA or split it across several.

ISAs are available through a variety of providers including banks, building societies, stockbrokers, credit unions and other financial institutions.

A cash ISA is similar to a standard savings account, but the interest you earn is tax free. They are generally considered low-risk because your initial deposit is protected. In the UK, cash ISAs are typically covered by the Financial Services Compensation Scheme (FSCS), which protects up to £120,000 per person, per financial institution.

There are three types of cash ISA:

1. Instant access cash ISA. You can deposit and withdraw money any time you wish without penalty, although your ISA provider may impose a limit. Instant access cash ISAs can be a good option if you want the flexibility to withdraw money from your savings but don’t know when you’ll need to do so.
2. Regular savings cash ISA. You typically earn a fixed interest rate as long as you deposit an agreed amount of money each month. You can save up to £1,666 per month without going over the £20,000 annual limit, though terms and conditions will vary between accounts.
3. Fixed rate cash ISA. Similar to fixed rate bonds, fixed rate cash ISAs commit you to locking away your money for a set amount of time, often to earn a more competitive interest rate. 

Some cash ISAs are flexible, meaning you can deposit and withdraw money from your account without it impacting your yearly tax-free allowance. The main stipulation is that you replace any money you take out within the same tax year. This is different to a non-flexible ISA, where any funds you withdraw will still count towards your ISA limit for that year.

In the 2026/27 tax year, the cash ISA allowance will decrease from £20,000 to £12,000 for under-65s. The £20,000 limit will remain in place across all ISAs, but you will only be able to deposit a maximum of £12,000 into cash ISAs. 

A stocks and shares ISA is an investment savings account that can include shares in companies, government and corporate bonds and investment funds. You can choose to open a managed account and pay for someone to manage your investments on your behalf, or you can make your own decisions on where to invest your money. Your investments are protected from UK tax, meaning you don’t have to pay income or capital gains tax on the money you earn.

Also known as an IFISA, an innovative finance ISA lets you use your ISA allowance to invest in peer-to-peer loans or purchase  debt securities. This type of account matches investors with borrowers who don’t want or can’t get a traditional bank loan.

A Lifetime ISA, or LISA, is only available to people over 18 and under 40, and it’s intended to help save towards a first home or retirement. Unlike other types of ISA, you can only save up to £4,000 per tax year in a LISA. The government will then add 25% to your savings, up to a maximum of £1,000 per year. You can only withdraw money from a LISA without paying a penalty if you are buying your first home, if you are over 60, or if you are diagnosed with a terminal illness.

A Junior ISA, or JISA, is a savings account that you can set up for a child below the age of 18. They’re often created to help build savings for the next generation. While the JISA will be in your child’s name, you or a legal guardian will need to open and manage the account until they turn 18. There are two types of JISA - cash, or stocks and shares. You can contribute up to £9,000 per year in addition to other ISA allowances.

There was previously another type of ISA specifically designed to help first-time buyers save for a mortgage deposit. The Help to Buy ISA offered a 25% government bonus, worth up to £3,000. The scheme is now closed to new applicants, but if you’re an existing account holder you can continue to save into your Help to Buy ISA until 30th November 2029.

When opening an ISA, consider its purpose, as this will determine the type of ISA that aligns with your goals. For example, if you’re setting aside cash for an emergency fund, you’ll need to be able to access it at short notice, so an instant access cash ISA might suit your requirements . On the other hand, if you want to save over the long-term and take advantage of compound interest, a fixed rate cash ISA might be more suitable. 

It’s also worth comparing ISA savings rates with those offered on other types of savings accounts. Some cash ISAs feature variable interest rates that typically give lower returns than other savings accounts, while others offer attractive introductory rates that drop after a year. It’s worth comparing your options, as you may be able to earn more interest with other types of savings accounts. You might consider fixed rate bonds as an alternative if they offer more competitive rates, and you will know the interest rate offered for the fixed term in advance.

If you change your mind after opening a new ISA, you may have a 14-day cooling-off period to cancel as per the UK’s Consumer Contract Regulation.

Deciding whether to open an ISA depends on your financial goals and how much you plan to save. Here are the main pros and cons to consider.

Advantages

• Tax-free returns: The primary benefit of an ISA is that you don't pay Income Tax or Capital Gains Tax on any interest or growth.
• Compound growth: Returns can be reinvested in full to help your savings grow faster over the long term.
• Accessibility: Cash ISAs can offer instant access to your funds, making them a flexible option for an emergency fund.
• Inheritance benefits: When an ISA holder passes away, their surviving spouse or civil partner can inherit a one-off additional permitted subscription (APS) allowance equal to the value of the deceased's ISA.

Disadvantages

• Annual limits: You are restricted to a £20,000 deposit limit per tax year. If you have more to save, you'll need to find other accounts for the excess.
• Lower rates: Sometimes, standard savings accounts offer higher interest rates than cash ISAs. If your returns are already protected by your Personal Savings Allowance (PSA), an ISA might offer a lower net return.
• Withdrawal penalties: Some ISAs, particularly fixed rate or Lifetime ISAs, may charge a fee if you withdraw your money early. 
• Investment risk: With stocks and shares or innovative finance ISAs, the value of your investments can go down as well as up.

To open an ISA in the UK, you must generally meet certain residency and age requirements.

• Residency. You must be a UK resident for tax purposes. If you move abroad, you can usually keep your existing ISA and still get UK tax relief on the money already in it, but you typically cannot put any more money into it (except for the Junior ISA). Crown servants (such as diplomats or members of the armed forces) who are serving overseas may also be eligible (along with their spouses or civil partners), although not all providers accept applications from citizens based overseas..
• Age requirements. The age at which you can open an ISA depends on the type of account:
  • Cash ISA: 18 years old or over.
  • Stocks and shares ISA: 18 years old or over.
  • Innovative finance ISA: 18 years old or over.
  • Lifetime ISA: You must be at least 18 but under 40 years old to open one.
  • Junior ISA: Available for children under 18 living in the UK.

You can’t open an ISA as a joint account or on behalf of someone else, except for a Junior ISA which must be opened by a child’s parent or legal guardian.

You can move your existing ISA to a new provider at any time. This is often done to secure a better interest rate or to consolidate multiple accounts. To keep the tax-free status of your money, you must use the official ISA transfer service. If you withdraw the money yourself to move it manually, it will count as a new deposit and use up your current year's allowance.

You can choose to transfer all or just part of the money in your ISA. You can also transfer your account from one type of ISA to another. For example, you could move money from a cash ISA into a stocks and shares ISA.

While ISAs offer tax benefits, they are not the only way to save. Standard savings accounts, such as fixed rate bonds or notice accounts, can also play a major role in your strategy.

The main difference is the PSA. Most people can earn a certain amount of interest every year without paying any tax. For basic rate taxpayers, this limit is £1,000, while higher rate taxpayers can earn £500.

If your total interest from all sources stays within your PSA, you might find that a standard savings account offers a higher interest rate than a cash ISA. In this case, you could get a better return on your money without needing to use your ISA allowance. 

Fixed rate bonds are an alternative to ISAs, especially if you’re a long-term saver. They typically offer competitive interest rates in return for locking away your money for a set period, ranging between six month fixed rate bonds to five year fixed rate bonds. Generally speaking, the longer the term, the higher the interest you’ll receive at the end. Learn more about the differences between fixed rate bonds and ISAs.

If you’d like a little more flexibility, a notice account may be suitable. These accounts tend to offer a more competitive interest rate  than easy access savings accounts while allowing you to withdraw your savings after a set notice period. The notice period can vary, but it’s typically between 30 and 120 days.

In some cases, you might choose to open an ISA alongside a savings account if you’ve exceeded your PSA. For more information on the differences between ISAs and savings accounts, see our ISAs vs savings accounts comparison.

Although we don’t currently offer ISAs at Raisin UK, you can still grow your savings by opening other types of savings accounts from our partner banks through our marketplace. To get started, you first need to open a Raisin UK Account. Once your account is active, you can choose from a wide range of savings products by logging in, applying for an account and transferring your deposit. This single login approach allows you to manage multiple savings accounts effortlessly in one place.

If you’ve got any questions, please contact our UK-based Customer Service team, who will be happy to help.