Understanding the different types of ISA and which is most suited to your goals

When saving and investing for the future, it’s important to consider the tax you could pay. By using tax wrappers to save and invest, you may be able to retain more of your wealth, giving you the confidence to pursue the lifestyle you want.

Since it was first introduced in 1999, the Individual Savings Account (ISA) has become one of the most popular tax wrappers as the UK government reports that 12.4 million UK adults subscribed to an ISA in 2022/23. This is an increase from 11.8 million in 2021/22.

However, ISAs have been criticised in the past for being too complex, as there are now five separate types, each with their own specific uses. Additionally, the rules surrounding ISAs have changed in recent years, and there are rumours that chancellor Rachel Reeves may make more amendments in the future.

Understanding how each type of ISA works and which goals they are most suited to could help you build wealth more effectively.

Read on to learn more.

You can contribute up to £20,000 across your adult ISAs each year

ISAs are an excellent tax wrapper because you don’t pay Income Tax, Capital Gains Tax (CGT) or Dividend Tax on interest or returns you generate from wealth in an ISA.

You can pay in up to £20,000 across all your adult ISAs in the 2024/25 tax year, and this limit is set to continue in 2025/26. You might pay the full £20,000 into a Cash ISA, for example. Alternatively, you might invest some money in a Stocks and Shares ISA and save into a Cash ISA too.

The ISA allowance resets annually and it’s a personal allowance too, so if you’re in a couple you could save up to £40,000 tax-efficiently between you.

Bear in mind that the rules are different for a Lifetime ISA (LISA) and Junior ISA (JISA) – more on this later.

Using your full ISA allowance each year could help you build more tax-efficient savings for the future. However, it’s important to consider your goals and which type of ISA is most suitable for you.

1. Cash ISA

A Cash ISA works in much the same way as a standard savings account – you make contributions and typically generate interest on your savings.

There are several different types of Cash ISA you might consider. You could pay into an easy access Cash ISA, which normally allows you to withdraw funds at any time without a penalty. Conversely, you could use a fixed-term Cash ISA, which locks your savings away for a set period, often in exchange for a higher interest rate.

Some fixed-term accounts won’t let you access your wealth at all before the end of the term, while others will charge a fee for withdrawing your savings.

If you’re saving for an emergency fund and may need access to your wealth at short notice, an easy access Cash ISA might be more suitable. However, if you’re setting aside funds for short- to medium-term goals such as a holiday or a new car, you may benefit from a fixed-term account with a more favourable interest rate.

Whichever type of Cash ISA you use, you won’t pay Income Tax on the interest you generate, nor will you pay tax when you take the money out.

In comparison, if you save outside an ISA, you’ll pay tax at your marginal rate on any interest that exceeds your “Personal Savings Allowance”.

In 2024/25, this is:

£1,000 if you’re a basic-rate taxpayer
£500 if you’re a higher-rate taxpayer
£0 if you’re an additional-rate taxpayer.

That’s why you may want to use some or all your ISA allowance to contribute to a Cash ISA before holding your savings elsewhere.

2. Stocks and Shares ISA

Cash ISAs can be useful for short- to medium-term savings. But when building wealth for the long term, you might benefit from investing through a Stocks and Shares ISA instead. Investing could help you generate higher returns in the long term, helping you beat inflation and achieve your financial goals.

A Stocks and Shares ISA allows you to purchase several different types of investments including:

Equities (stocks and shares)
Bonds
Exchange Traded Funds (ETFs).

Investing in a Stocks and Shares ISA may be preferable to using a General Investment Account (GIA) as you won’t pay CGT or Dividend Tax on your returns. So, if you plan to invest in the future, consider contributing to your Stocks and Shares ISA if you still have some ISA allowance available.

3. Innovative Finance ISA

An Innovative Finance ISA (IFISA) allows you to invest through peer-to-peer lending schemes, which match you up with individual borrowers. You might make loans to individual entrepreneurs or startup businesses, for instance.

In some cases, these investments might offer significant returns, but you may adopt a high level of risk. As such, it’s important to carefully consider whether an IFISA is suitable for your goals, or if you would benefit from investing through a Stocks and Shares ISA instead.

4. Lifetime ISA

The Lifetime ISA (LISA) is a unique account designed to help savers buy their first home or build wealth for retirement.

You can open a LISA if you’re aged between 18 and 40, and may contribute up to £4,000 a year until you’re 50. These contributions count towards your £20,000 ISA allowance.

It’s up to you how you hold this wealth. You can either keep cash savings, invest as you would through a Stocks and Shares ISA, or a combination of the two.

Crucially, the government adds a 25% bonus to your savings, up to a maximum of £1,000 a year.

Normally, you can only withdraw the funds from your LISA if you are:

Buying your first home
Aged 60 or above
Terminally ill with less than 12 months to live.

If you take the wealth out for any other reason, you will usually face a 25% charge. Essentially, the government takes back the bonus they added to your savings.

Consequently, if you want flexible access to your wealth, a Lifetime ISA may not be suitable. However, it could be useful for first-time buyers or to supplement a retirement fund.

That said, it’s important to consider alternative options such as pensions when saving for retirement as these may be more suitable for your situation. We can help you create a tailored retirement plan and determine the most effective ways to build wealth for later life.

5. Junior ISA

As well as saving and investing for yourself, you might want to build wealth for your children or grandchildren. A Junior ISA (JISA) could help here as it offers all the same tax benefits as your adult ISAs.

In 2024/25 and continuing into 2025/26, you can contribute up to £9,000 to a JISA for each child or grandchild, in addition to your own £20,000 ISA allowance.

You might save in a Junior Cash ISA or invest through a Junior Stocks and Shares ISA, in much the same way you would use your own accounts.

When the child turns 16, they can take control of the account and when they’re 18, it automatically changes to an adult ISA in their name.

A JISA could be particularly useful if you’ve already used your own ISA allowance for the year and want to build a tax-efficient nest egg for your child or grandchild.

Get in touch

We can review your financial goals and advise you on which types of ISAs are most suitable.

Please contact us at hello@ardentuk.com or call or WhatsApp us on 01904 655 330. As an award-winning financial advice company with advisers included in the 2024 VouchedFor Top Rated guide, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.