What is an ISA? How do ISAs work?

What is an ISA (Individual Savings Account) ?

An ISA, or Individual Savings Account, is a savings account that is tax-free. It does have one limitation: the amount of money you can save or invest in an ISA in a single tax year – also known as your annual ISA allowance. This allowance is £20,000 for the current tax year.


It’s helpful to think of an ISA as a protective box: the contents are tax-free. There are two basic types of ISAs to choose from: Cash ISAs and Stocks & Shares ISAs.

So what does a Cash ISA mean?

Cash ISAs work more like regular savings accounts in that you deposit cash and it earns tax-free interest.

What exactly is a Stocks and Shares ISA?

The ISA for investments is known as a Stocks and Shares ISA: instead of simply saving, you invest in things like stocks and shares, bonds, gilts, or commercial property to help your savings grow over time, and any interest or returns you receive are tax free.

Shares and Stocks Although ISAs have the potential for faster or greater growth, because they are based on the stock market, there is always the risk that the amount of money in your ISA will go down as well as up.

ISAs come in a variety of shapes and sizes:


In addition to the basic Cash ISA and Stocks & Shares ISA, various types have been developed to assist people in saving for a variety of purposes, including:

Lifetime ISA – to assist you in saving for your first home or retirement.

Junior ISA – to assist you in saving for your children.

How do ISAs work?


If you live in the UK and are over the age of 16, you have the right to save a certain amount of money in an ISA each year. This is referred to as your ISA allowance.

Once your money is in an ISA, it cannot be taxed, regardless of how long it has been there. 

What are the advantages of an ISA?

  • Your savings will grow tax-free.
  • The current tax year’s annual allowance is £20,000
  • Each new tax year, your annual allowance is reset.
  • Existing ISAs can be transferred into your new ISA.
  • Children between the ages of 16 and 18 can have both a Junior and a standard Cash ISA.
  • There are specific ISAs available to assist you in saving for your first home or retirement.
by Rachel Buscall

by Rachel Buscall

Co-Founder & Managing Director at New Capital Link. Having started her career in the financial sector, Rachel demonstrated a natural flair for entrepreneurship.

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