19 February 2020

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A guide to ISAs

If you are looking for a new way to save or you’re thinking about investing, ISAs could be a good idea. They are designed to be easy to understand, you can usually withdraw money when you want and the best bit? You will not pay any UK tax. 

This blog will explain what an ISA is, the different types of ISAs available in the UK, how they work and the pros and cons to help you weigh up your options.

Did you know?

  • Over £600 billion is invested in adult ISAs in the UK
  • Stocks & shares ISAs make up over half of the market value
  • Over 35% of UK adults have an ISA

Source: HM Revenue & Customs Individual Savings Account (ISA) statistics (April 2019).

What is an ISA?

Individual Savings Accounts (ISAs) were first introduced in the UK by the government in April 1999, replacing the earlier Personal Equity Plans and Tax-Exempt Special Savings Accounts (TESSAs).

ISAs aim to encourage UK residents (or a member of the armed forces serving overseas, or their spouse / civil partner) to save and invest in a tax-efficient way. This means that you will not pay tax on any income or capital gains and no tax is payable when money is withdrawn from an ISA, so you could be getting more for your money.

What are the benefits?

Opportunities to minimise the amount of tax you pay on your hard-earned cash are few and far between, so having an ISA could be a wise decision. Some ISAs give you instant access to your money and could be used to plan your finances for the short term. On the other hand, if you have longer term savings goals, you can choose to lock your cash away for a fixed term or you could invest in an Investment ISA.

ISAs give you the opportunity to save tax-free

What types of ISA are available?

There are four main types of ISA available but not all providers will offer each type. 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 in a tax year, providing you don’t exceed the annual allowance:        

Cash ISA

Usually offered by a bank or building society which gives you tax-free interest on a fixed or variable rate and doesn’t count towards your Personal Savings Allowance (PSA). Cash ISAs could be 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.

Investment ISA

Also known as a stocks & shares ISA. A tax-efficient investment which allows you to invest your money in things like shares, government bonds (gilts) and property with peace of mind that you won’t pay any capital gains tax or income tax. This type of ISA might be more suitable for your longer-term goals as they have the potential to out-perform cash ISAs over the medium-long term, but with varying levels of risk. The three main factors to consider when choosing between a cash ISA and a stocks and shares ISA is the length of time you’ll be saving/investing, your appetite to risk and the impact of inflation over time.

Sheffield Mutual offers a low-medium risk Investment ISA so if you’re not experienced when it comes to investing but you want your money to work harder, you can let us make the difficult investment decisions. We’ll pool your money together with all our other members to provide you with a potentially better return than what you might find on the high street. You may be covered up to 100% of your claim (investment loss is not covered) with the Financial Services Compensation Scheme and ‘smoothing’ should protect your investment from short term ups-and-downs.

Innovative Finance ISA

A type of investment account which allows you to lend your money through peer-to-peer lending platforms to receive tax-free 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 and 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 Lifetime ISA could be an ideal option to save towards your first home

How much can I pay into an ISA?

There is a limit you can pay into ISAs each tax year and this is called your annual allowance. Paying into an ISA is known as subscribing. For the 2022/23 tax year, your annual allowance is £20,000 and you have until midnight on 5 April 2023 to use this allowance. If you don’t use your ISA allowance, you will lose it as it cannot be carried forward.

However, you will have a new annual allowance available from 6 April 2022 in the 2023/24 tax year, so if you have already put £20,000 into an ISA in the 20212/23 tax year, you could put another £20,000 away on or after 6 April 2023.

However, please remember that you can only pay into one of each type of ISA in a tax year, within the annual allowance.

Can I transfer an ISA?

If you are unhappy with your current ISA or provider, your ISA subscriptions can be transferred freely between cash, stocks and shares, and innovative finance ISAs and there is a process in place to ensure that you retain all the tax-free benefits when you apply to transfer.

The beauty of transferring an ISA is that it won’t count towards your current annual allowance**, so, if you have used your full ISA allowance for this tax year, you can still transfer as many ISAs, in full or in part, from previous tax years (started before 5 April) without having to worry about exceeding any annual limits.

You should, however, be aware that if you transfer an ISA opened in the current tax year, you must transfer the full amount that you have put in this tax year.

What about children?

Children under the age of 18 who do not have a Child Trust Fund account (available to eligible children born on or between 1 September 2002 and 2 January 2011) can have a Junior ISA. 

Junior ISA

A cash or stocks and shares 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 18.

If you’re looking to give a child a solid financial head start in life, with tax-free returns and a capital guarantee on any money invested over five years, Sheffield Mutual offers a low-medium risk Investment Junior ISA. As we’re a mutual, we don’t have any shareholders to pay so all surplus profits are shared with our members and you can be sure that we’ll look to provide your child with the best possible return. 

A Junior ISA must be opened by the child’s parent or guardian, but anyone can contribute once the account has been opened


Personal Savings Allowance (PSA): Introduced in April 2016, the PSA now means most savers in the UK no longer have to pay tax on their savings income. Basic-rate taxpayers qualify for a £1,000 PSA, so can receive up to £1,000 a year in savings income tax-free. Higher-rate taxpayers qualify for a £500 year allowance. ISAs are tax free so any interest from an ISA doesn’t count towards your PSA.

Financial Services Compensation Scheme (FSCS): The UK’s statutory insurance and investors compensation scheme for customers of authorised financial services firms. The FSCS can pay compensation if a firm is unable, or likely to be unable, to pay claims made against it. The FSCS doesn’t cover investment performance.

Smoothing: A process of holding back some surplus profit in good years to top up returns in years where investment performance is not as positive.

**Subscriptions in previous tax years won’t count towards your annual ISA allowance but if you are transferring your Help to Buy ISA into a Lifetime ISA it will count towards your annual £4,000 limit.

This blog is based on our current understanding of tax legislation, which could change in the future.

The value of your investments can go down as well as up, and you may get back less than you originally invested.

This blog provides generic information and opinions of the writer and should not be relied upon for making investment decisions. No financial advice has been provided by Sheffield Mutual. If you are in any doubt as to whether a savings or investment plan is suitable for you, you should consider contacting a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk or www.vouchedfor.co.uk. Advisers may charge for providing such advice and should confirm any costs beforehand.

By Dawn Webb


Chief Commercial Officer

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