The difference between Cash, Stocks & Shares and other other ISA types.
There are five different types of ISA. Four of these are for adults and the fifth is for under 18s – but which one should you be using? Here’s our guide to help you choose.
What is an ISA?
ISA stands for Individual Savings Account. It’s basically just a type of account where you can save or invest your money, the same as a normal savings account or general investment account – but with one big difference.
The interest you earn from savings or gains and dividends paid by investments are all tax-free. Though there are other allowances outside of an ISA that do the same, growth in an ISA will always remain tax-free.
A common misunderstanding is that your money is only tax-free while it’s in an ISA, but this is just talking about new interest or gains. Even if you withdraw money from an ISA it’s still tax-free. What won’t be are any additional earnings you make from that money in non-ISA accounts.
There are however some restrictions with ISAs, notably the annual cap on deposits each financial year – currently at £20,000. But this resets each year, so you can potentially build up a hefty amount over the years that keep earning tax-free.
What are the different ISAs?
There are four key types of ISA: Cash, Stocks & Shares, Innovative Finance and Lifetime. We’ve gone into more detail on these below.
You can only contribute to one of each type in a financial year, so you can’t add money to two Cash ISAs, or two Stocks & Shares ISAs for example.
But you can pay into a mix of those different accounts. So you can have both a Cash and a Stocks & Shares, or a Cash and a Cash Lifetime and so on.
The fifth major ISA is Junior ISA for under 18s. This is completely separate from the other ISAs, so you can pay money into your kids Junior ISA as well as your own.
What is a Cash ISA?
A Cash ISA is the closest to a normal savings account. You’ll pay in your cash and get interest at an advertised rate – all of which is tax-free.
As with other savings accounts, there are different types of Cash ISA. The most common are easy access and fixed, (though you can also get some regular and notice ISAs).
An easy access Cash ISA will let you take your money out as and when you want it – though you’ll usually get a lower rate as a result. A limited access Cash ISA might only allow a handful of withdraws a year, usually ranging from one to six, though the rates can be better with these.
Fixed rate ISAs lock your money away for a year or more, and rates will be better still. Unlike fixed rate bonds outside of an ISA, you can actually access this cash during the fixed period. However there will be an interest penalty to do so. These vary by provider but tend to get bigger the longer the fix. Even so, it’s a good option if you unexpectedly need to access your cash – or even want to move it to a better paying fix.
Some providers will let you open a Cash ISA from 16 years old, others might only allow you at 18.
Cash ISAs vs savings accounts
As mentioned, there are ways to earn interest tax-free outside of an ISA. Low earners will have their personal allowance (on all income, including savings) before income tax is taken plus something called the Starting Rate for Savings.
But the one that will apply to most people is the Personal Savings Allowance (PSA). This is set at £1,000 each financial year for basic rate taxpayers and £500 for higher rate tax payers. Additional rate tax payers don’t get any PSA. If you earn more interest than your PSA in a year you’ll pay tax at your rate on the interest above your allowance.
So if you are a basic rate tax payer earning £1,100 in interest, you’d get £1,000 tax free but pay 20% of £100 (so £20). A higher rate tax payer would get £500 tax free, but pay 40% of £600 (£280).
It means you might be better off with some of your money in an ISA even if it pays a lower rate. Here’s further analysis of how to work that out.
A Stocks and Shares ISA is for investments (and you might sometimes hear people refer to them as Investment ISAs). Your gains are protected from tax, as are any dividends paid.
Since investing is best suited for longer periods, at least five years, there’s the potential over this time for quite large growth. If you invested outside of an ISA you could have a hefty tax bill when it comes to sell any shares, especially with the Capital Gains Tax reduced significantly in 2023 and 2024.
As with all investment accounts there will be fees added or deducted to cover both the investment platform and the funds themselves. And don’t forget there’s always the risk that you lose rather than make money.
You have to be 18 years old to open a Stocks & Shares ISA.
Can you have cash in a Stocks & Shares ISA?
When you add money to a Stocks and Shares ISA it’s usually in cash and then you choose to invest it. You can however keep it as cash. Most investment ISAs won’t also give you interest, but some do (though don’t expect huge returns).
What is a Lifetime ISA?
A Lifetime ISA, or a LISA, is an ISA that can be used for either buying your first home or for retirement savings – and you’ll get a 25% bonus on the money you add, courtesy of the government. That free cash is also tax-free.
It can be either a Cash LISA or Stocks and Shares LISA, but you’re capped at adding £4,000 to this type of ISA each year (this comes out of the overall £20,000 ISA allowance rather than on top of it).
There’s a cap on the property value use of £450,000. If you don’t use it for this you need to wait until 60, or pay a small penalty to withdraw the cash earlier on top of losing the 25% bonus.
Regardless of whether you opt for a Cash or Stocks LISA, you need to be 18 years old to start. And unlike others you can only open one up until the age of 40. You’ll also only get the bonus until the age of 50.
I’ve written an in-depth guide to Lifetimes ISAs which is worth checking out.
What is an Innovative Finance ISA?
An Innovative Finance ISA is a way to earn tax free returns from peer-to-peer lending (P2P). You’re basically lending the account provider loan your cash out to businesses and individuals at higher rates.
As long as they pay it back you’ll get your money. If they don’t you could lose out (though in practice your cash will be pooled and loaned out to a large number of people to minimise the risk).
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What is a Junior ISA?
A Junior ISA is a way to save for under 18s. As with other ISAs all interest or returns are tax free. It comes with it’s own allowance of £9,000 per financial year.
Whether you go for a Cash or Investment version of the Junior ISA the money is locked away until the child turns 18 and the account will become a normal ISA. Then they can do what they want with it!
We’ve listed the top paying ones in our Children’s Savings accounts page.
What is a Flexible ISA?
Hang on, didn’t you say there were five types of ISA? What’s this extra one? Well, this relates to all ISA types (except Lifetime ISAs), though not all ISAs are flexible – so you need to check. So you could have a Flexible Cash ISA or a Flexible Stocks and Shares ISA etc.
A Flexible ISA allows you do withdraw money during the year from your ISA without it impacting your overall £20,000 allowance for the year if you make further contributions.
Say you add £10,000 to an ISA and withdraw £5,000, you will be able to make a further £15,000 of contributions in the financial year rather than just £10,000. However, the money will need to go back into the same ISA and be paid back in the same financial year you withdrew it.
Surprisingly, this can relate both to money paid during the year in question and previous years – though do check with each provider that they’ll allow this for their accounts.
Here’s an example of how that could look. If you have an overall balance of £50,000 in ISAs, of which £45,000 is from previous years and £5,000 is for this year, and then withdraw all £50,000, if the ISA is flexible you can add a total of £65,000 to the ISA before the financial year ends.