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What is an ISA?

Find out more about ISAs; the difference between Cash and Stocks and Shares ISAs (also known as Investment ISAs), how they could save you tax, and other common questions.

In this introduction to ISAs

ISAs explained

An ISA is an Individual Savings Account which offers a tax-efficient way to either invest or save. ISAs are one of the most popular and accessible tools to benefit from generous tax breaks offered by the government to encourage you to save.

An ISA is not an investment in its own right but a home for you to house your savings within.

The best way to think of an ISA is as a 'wrapper' in which you can shelter your savings and investments from tax.

Download your free 'Investors' guide to ISAs'

How do ISAs work?

Within an ISA there is no capital gains tax and no UK tax on income or interest. ISAs don't need to be declared on a tax return, and less tax means higher returns for you.

Used regularly, the annual ISA allowance offers the chance to create a substantial portfolio sheltered from the taxman, although remember tax rules can change, and the benefits will depend on personal circumstances.

Every year each individual has an ISA allowance. This tax year the allowance is £20,000.

Find out more about this tax year's ISA allowance

What is a Stocks & Shares ISA?

A stocks and shares ISA offers the opportunity to invest your ISA allowance. Here are some of the investments you can choose.

  • Funds, such as unit trusts and OEICs, entrust the choice of the underlying investments to a professional fund manager. They pool your money with that of other investors, which enables a spread of investments - and risk - across dozens of different shares, bonds, gilts or property.

  • Shares are essentially a way of buying a 'share' of a company, which entitles investors to a share of any profits generated by way of a dividend. Companies which manage to grow their profits (and dividends) over the long-term will generally see the value of their shares rise.

  • Fixed interest securities, such as gilts or corporate bonds, are essentially loans to businesses. At the outset of the loan, the company agrees to pay a fixed rate of interest for the duration of the loan. At the end of the loan, the company repays the investor’s original capital.

    The risk to the investor is if the company is unable to meet its obligations and defaults, in this instance the investors could lose some or all of their interest payments and capital.

View ISA investment ideas

Remember, all stock market investments can fall in value as well as rise, so you could get back less than you invest.

Tax benefits of investing in a Stocks & Shares ISA

Basic rate tax-payer Higher rate tax-payer Additional rate tax-payer Within an ISA
Capital gains (in excess of the £11,300 annual allowance) 10% 20% 20%0%
Dividend income over £5,000 (i.e. income from shares) 7.5% 32.5% 38.1%0%
Interest income (i.e. from cash, corporate bonds and other fixed interest investments) 20%
(over £1,000)
(over £500)

Tax rules change over time and the benefit of sheltering your investments from tax will depend on your circumstances.

Use our ISA calculator to see how much your ISA could be worth

What is a Cash ISA?

Cash ISAs operate just like a normal savings account except the interest is tax-free. Interest rates vary and they are often offered with temporary bonuses or introductory rates.

Cash can form a good basis for a portfolio - unlike stock market investments, cash savings can offer immediate access and the capital is guaranteed not to fall in value.

Choosing between a Cash ISA or Stocks and Shares ISA

Cash ISAs are often more suitable for short term investing, typically less than 5 years whereas a Stocks and Shares ISA is usually regarded as more suitable for longer term investing, typically for more than 5 years.

Stock market investments can fall in value as well as rise so you could get back less than you invest. Over the longer term they can deliver significantly higher returns but they are higher risk. Please remember past performance is not a guide to the future.

Open a Stocks & Shares ISA online in minutes

Open your ISA today from as little as £25 a month or with a lump sum of £100 or more. If you're unsure where to invest in your Stocks & Shares ISA, you can open it today, hold your money as cash in your Stocks & Shares ISA and then choose your investments later.

Open a Stocks & Shares ISA