Types of ISA

Learn about the different types of ISAs and which ISA could be right for you.
Types of ISA
Updated
May 9, 2022

Table of contents


1999. Is it a year you remember? 

I was wearing fluorescent outfits to school discos and crimping my hair. So, memorable? Yes but fashionable, no. 

But 1999 was a big year for another reason. 

And that’s the birth of the ISA (or individual savings account).

ISAs were introduced by the UK government to help savers and investors shelter their money from tax and in turn, encourage us to save more. 

Back then you could protect £7,000 from tax but the current ISA allowance is much more generous at £20,000 for the 2021/22 tax year. 

And it’s not just the ISA allowance that’s changed, there are a few different types of ISAs available now, each with slightly different features and benefits. 


Before we start it’s important to know this article isn’t personal investment advice and that tax rules for ISA accounts can change and their benefits depend on your individual circumstances. It’s also important to understand that the value of your investments can rise and fall, and you may get back less than you invested.


How do ISAs work?

ISAs are tax-efficient accounts. This means that whatever is inside your ISA be it cash, investments or a bit of both are protected from a few big UK taxes. 

Inside an ISA you won’t have to pay: 

  • Income tax on dividends or savings interest 
  • Capital gains tax if you sell your investments for a profit

ISAs go by a few names and the one you’ll likely see a lot of is ‘tax wrapper’. Just like with a sweet wrapper, whatever’s on the inside of the wrapper is protected. 


How much can you put in an ISA? Cue the ISA allowance. 

Each tax year HMRC sets an ISA allowance and it’s the total amount of money you can put into your ISAs that year. 

As we mentioned above the ISA allowance for the 2022/23 tax year is £20,000. And this can be split across different types of ISAs if you’d like.

A tax year runs from 6 April to 5 April the following year, so the current tax year 2022/2023 ends on 5th April 2023 at midnight. If you don’t use your ISA allowance by then, you’ll lose it. 


Compare different ISA accounts

Here’s a short and sweet comparison of the different types of ISAs in the UK.  

Stocks and shares ISA 

Stocks and shares ISAs (sometimes called ‘investment ISAs’ or ‘share dealing ISAs’) are accounts that protect your investments and any investment growth from owing taxes. 

They are an ISA account for those looking to invest their savings and hopefully grow them over the long term. 

What do we mean by long-term? 

When you invest you should be happy to leave your money invested for a few years but the longer the better. 

Stocks and shares ISA
This ISA is for... Your investments and any cash you plan to invest shortly.
What can you put in it?

Stocks

ETFs

Investment Trusts

Funds

Bonds

Cash

Who can open this ISA? Anyone over 18 and a UK resident for tax purposes.
How much can you pay into it?

Up to £20,000 each tax year.

Benefits

Tax-free growth, you won’t pay capital gains tax on any profits.

No UK income tax on dividends or interest.

Tax-free withdrawals.

Drawbacks

Returns are not guaranteed.

Investments can go up and down in value.


Cash ISA  

Cash ISAs are designed as a home for your cash savings. 

We think it’s best to think of cash savings as money you’ll probably need to use in the immediate future (say within the next few years). 

This could be your rainy-day fund or holiday savings, the main proviso is that you need to know the nominal value of your cash (i.e. its face value) won’t change, on paper your £1,000 will still be £1,000. 

But while cash tends to hold its value in the short term, when it comes to growing your savings, keeping everything as cash is unlikely to be the best option. 

Unless the interest rate you are getting on your cash is higher than the rate of inflation, left as cash, your money is likely to be worth less in the future. Your £1,000 won’t get you as far as it did a few years ago.  

Given the higher levels of inflation we’re seeing at the moment, it could be a good idea to check in with your cash savings. 

Cash ISA
This ISA is for... Your cash savings.
What can you put in it?

Cash

Some NS&I products

Who can open this ISA? Anyone over 16 and a UK resident for tax purposes.
How much can you pay into it?

Up to £20,000 each year.

Benefits

Savings interest is tax-free.

Capital protection.

Easy access and fixed-term savings rates are available.

Drawbacks

Cash savings are not risk-free.

The value of your cash could drop if the savings rate you receive is lower than inflation.

💡 More on saving vs investing.

Help to Buy ISA

A Help to Buy ISA is a type of cash ISA designed specifically to help first time home buyers save up for their mortgage deposit. 

Help to Buy ISAs have been closed to new applicants since 2019. However, if you already had one at this point, you can keep contributing to it until 30 November 2029. 

You can save up to £200 a month in a Help to Buy ISA and the government will pay a 25% bonus applied to the amount you’ve saved (up to a maximum bonus of £3,000) when you use your Help to Buy for a mortgage deposit. 

The scheme is gradually being wound down which means you have until 1 December 2030 to claim the bonus. If buying a house is further away than this you could always transfer your Help to Buy ISA to a Lifetime ISA (see below). 

It’s worth noting that because a Help to Buy ISA is a cash ISA you can’t contribute to both ISAs in the same tax year.  

Lifetime ISA (LISA)

Lifetime ISAs were introduced to offer us a bit more flexibility when it comes to saving for the future. 

Similar to Help to Buy ISAs, Lifetime ISAs are designed to help you save for your first house and can go towards your mortgage deposit. The government will also provide a 25% bonus to your contributions. But Lifetime ISAs aren’t exclusively for buying a home. 

They can also be used to save for later life or retirement. With a Lifetime ISA, you can take money out of it from the age of 60. 

Lifetime ISAs come with quite a few rules and regulations, including a specified value of the house you can buy with it. It’s definitely worth reading up on these before putting any money in. 

If you decide you’d like to take your money out and it’s not to buy your first home or it’s before you are 60, you’ll pay a 25% withdrawal penalty (which takes back the 25% government bonus). 

Lifetime ISA
This ISA is for... Saving for your first house or retirement.
What can you put in it?

Investments

Cash

Who can open this ISA? To open a LISA you must be over 18 and under 40.

You can top up your LISA until you're 50.

You also must be a UK resident for tax purposes.

How much can you pay into it?

Up to £4,000 each year.

Benefits

Tax-free growth.

The government pays a 25% annual boost for contributions up to £4,000.

Drawbacks

You can only withdraw money from your Lifetime ISA if you're buying your first house, over 60 years old or terminally ill.

Strict rules on what you can withdraw the money for, and when you can take it out without paying a government withdrawal charge.

Innovative Finance ISA

Innovative Finance ISAs (IFISAs) are aimed at a set of investors known as ‘restricted investors’. 

When you see this label, the investment behind it is most likely higher risk and aimed at those that understand the risk they are taking and can afford to withstand any losses. 

Innovative finance ISAs don’t hold your everyday investments, they hold peer-to-peer loans which match up investors (those willing to lend) with borrowers (often businesses). 

With peer-to-peer loans you lend directly, cutting out the bank - and this is where the potential for higher returns comes from. But it also means your investments might not be protected by the FSCS (like they would be with a cash or stocks and shares ISA). This means that if the platform were to crash (a few have in recent years) you’d lose your money.

Innovative finance ISA
This ISA is for... Restricted investors.
What can you put in it?

Peer-to-peer loans (loans provided without a bank)

Cash

Who can open this ISA? Anyone over 18 and a UK resident for tax purposes.

Classified as a restricted investor.

How much can you pay into it?

Up to £20,000 each year.

Benefits

Can offer higher rates of interest than a traditional savings account.

Drawbacks

Riskier investments aimed at investors who can afford to take more risk.

Peer-to-peer platforms are not always protected by the FSCS scheme.


How to choose the best ISA for you? 

When thinking about which type of ISA to choose, it’s best to think about which one gets you closest to your goal. 

What is your ISA for?

  • Are you saving for the future but nothing too specific like a house deposit or retirement? 
  • Are you looking for an alternative to an everyday savings account?
  • Are you looking to make more of your savings by investing? 
  • Do you need your ISA to be flexible in terms of what you can spend it on and when you can use it? 
  • Do you want to be able to hold cash and investments at the same time? 

Depending on your answer, it’s likely one ISA starts to seem like a more obvious choice. 

Remember too, you can mix and match your ISAs and spread your £20,000 ISA allowance across different types of ISAs.

Can you have more than one ISA? 

Being able to mix and match ISAs shows that yes, you can have more than one ISA. 

But there is a catch. 

You can only open or add money to one of each type of ISA, in a tax year. 

For example, you can add money to one cash ISA and one stocks and shares ISA in a year. But you can’t add money to two stocks and shares ISAs in the same year.

Transfer an ISA

Decided to postpone the round the world trip and invest the cash instead?

Not necessarily a decision many of us will face, but if we do, the good news is which ISA we have can change too (if needed). 

Perhaps a cash ISA looked like the obvious option a few years ago but now a stocks and shares ISA looks closer to your investment goals.

Check with your ISA provider (or future ISA provider) first, but you can more often than not, transfer one ISA into another or to another provider. 

This is often something used by those that have been on the ISA scene for a while and have collected a few different ISAs along the way. You could potentially transfer your ISAs to the same platform and keep them in one place. 

The more rules an ISA comes with (e.g. a Lifetime ISA) the trickier it can be for transfers. Just check with your provider before you start.  

If it’s a stocks and shares ISA you’re after, learn more about transferring your ISA to Freetrade.

Build your financial knowledge and be better positioned to grow your wealth. We offer a wide range of financial content and guides to help you get the insight you need. For example, learn how to invest in stocks if you are a beginner and make the most of your savings with ISA allowance or tax relief on pension contributions.


Important information on SIPPs

SIPPs are a pension product designed for people who want to make their own investment decisions. You can normally only access the money from age 55 (set to rise to 57 from 6 April 2028).

This article is based on current rules, which can change, and tax relief depends on your personal circumstances. When you invest, your capital is at risk.

The value of your portfolio can go down as well as up and you may get back less than you invest.

Before transferring a pension you should ensure you will not lose valuable guarantees or incur excessive transfer penalties. Pensions are usually transferred as cash so you will be out of the market for a period.

Freetrade does not currently offer drawdown products for our SIPP.

Important information

This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice.

When you invest, your capital is at risk. The value of your portfolio, and any income you receive, can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.

Eligibility to invest into an ISA and the value of tax savings both depend on personal circumstances and all tax rules may change.

Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).

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