What is an ISA savings account?

How many ISAs can I have?

Every tax year you can put money into one of each kind of ISA.

The tax year runs from 6 April to 5 April. At the end of the tax year, your ISAs will stay open and continue to earn interest. It’s important to remember: although you can have any number of ISAs open at one time, you can only pay into one of each type per year.

So if you already have a cash ISA open with one provider from a previous tax year, you can open a new cash ISA with a different provider. But you can only pay into one of those cash ISAs during the same tax year. 

How much can you put in an ISA?

There’s an annual limit on how much you can save in ISAs, known as an ISA allowance. For the current tax year, the annual ISA allowance is £20,000. 

This limit applies across all the different types of ISA you may hold, and you can split your allowance across these different types if you want to. Or, you can pay the full £20,000 into a single type of ISA. You can only pay £4,000 into a lifetime ISA in one tax year. 

For example: 

Can you make withdrawals from an ISA?

You can usually take your money out of an ISA whenever you like.  But there are different rules around putting that money back in depending on the whether the ISA you hold is flexible or not.

If your ISA is a ‘flexible’ one, you can take money in and out without it reducing your annual allowance of £20,000 . So you could put in £10,000, withdraw £3,000 and then put £13,000 back in.

If your ISA is ‘not flexible’, any money you take out can’t be replaced within your annual ISA allowance. For example:

• You save £15,000 in a cash ISA.
• You withdraw £5,000, leaving your ISA balance at £10,000.
• Now you can only add another £5,000 to your ISAs this tax year. 

This is because the annual ISA allowance applies to what you pay in, not what you save overall.

When could a cash ISA be worthwhile?

Each tax year, you can use your annual ISA allowance to build a pot of savings that’s sheltered from tax. If you don’t use your annual ISA allowance then you lose it for that tax year – and with it you lose the opportunity to save that amount of money tax-free. 

The annual ISA allowance means the total amount you save and shelter from UK tax grows over time. Using the full allowance each year could help you protect substantial amounts from future tax. If you have savings in a normal savings account, at some point you may need to pay tax on the interest you earn. With an ISA, all the interest you earn, you keep – as long as your savings stay in an ISA.  

Although the introduction of the Personal Savings Allowance in 2016 means that most UK savers won’t pay tax on their savings, the allowance you get depends on your tax bracket:

So if you’re a top-rate taxpayer, or have a bigger savings balance that means you may use up your Personal Savings Allowance, there are potentially tax advantages of holding savings in a cash ISA.

And it’s not just now you need to think about. Your salary may increase and push you into a higher tax bracket, meaning more (or all) of your savings held outside an ISA could be subject to tax. There’s also a chance the Personal Savings Allowance could change, and ISA allowances can also change from time to time.

ISAs could help you future-proof your savings

All this is set against the current backdrop of historically low interest rates. The Personal Savings Allowance may seem like a lot at the moment, but if rates start to rise again, savers may end up using more of their allowance.

For example, if you had £30,000 in savings now and rates went up over three years, each year you’d be earning more interest than the last. Unless you’d saved this money in an ISA, any interest you earn may be subject to tax.

By the end of year three, £222.87 of interest would be subject to tax if you’re a basic-rate tax payer, or £722.87 if you’re a higher-rate tax payer.

Saving that money in an ISA instead would protect your interest from tax – and keep it protected over the years you save it.