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.

New Capital Link

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Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be very complex and high risk.

What are the key risks?

1. You could lose all the money you invest

If the business offering this investment fails, there is a high risk that you will lose all your money. Businesses like this often fail as they usually use risky investment strategies. 

Advertised rates of return aren’t guaranteed. This is not a savings account. If the issuer doesn’t pay you back as agreed, you could earn less money than expected or nothing at all. A higher advertised rate of return means a higher risk of losing your money. If it looks too good to be true, it probably is.

These investments are sometimes held in an Innovative Finance ISA (IFISA). While any potential gains from your investment will be tax free, you can still lose all your money. An IFISA does not reduce the risk of the investment or protect you from losses.

2. You are unlikely to be protected if something goes wrong

The business offering this investment is not regulated by the FCA. Protection from the Financial Services Compensation Scheme (FSCS) only considers claims against failed regulated firms. Learn more about FSCS protection here. https://www.fscs.org.uk/what-we-cover/investments/ or

Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker here. https://www.fscs.org.uk/check/investment-protection-checker/

The Financial Ombudsman Service (FOS) will not be able to consider complaints related to this firm or Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated firm, FOS may be able to consider it. Learn more about FOS protection here. https://www.financial-ombudsman.org.uk/consumers

3. You are unlikely to get your money back quickly

This type of business could face cash-flow problems that delay interest payments. It could also fail altogether and be unable to repay investors their money. 

You are unlikely to be able to cash in your investment early by selling it. You are usually locked in until the business has paid you back over the period agreed. In the rare circumstances where it is possible to sell your investment in a ‘secondary market’, you may not find a buyer at the price you are willing to sell.

4. This is a complex investment

This investment has a complex structure based on other risky investments. A business that raises money like this lends it to, or invests it in, other businesses or property. This makes it difficult for the investor to know where their money is going.

This makes it difficult to predict how risky the investment is, but it will most likely be high.

You may wish to get financial advice before deciding to invest.

5. Don’t put all your eggs in one basket

Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well. 

A good rule of thumb is not to invest more than 10% of your money in high-risk investments. https://www.fca.org.uk/investsmart/5-questions-ask-you-invest

If you are interested in learning more about how to protect yourself, visit the FCA’s website here: https://www.fca.org.uk/investsmart

For further information about minibonds, visit the FCA’s website here.https://www.fca.org.uk/consumers/mini-bonds