What is an ISA and how do they work?

Get answers to some of the most frequently asked questions about ISAs (Individual Savings Accounts) and Unit Trusts with our handy FAQ.

The value of your investment can go down as well as up and you may not get back the amount you put in.


What is an ISA?

ISAs are an easy way to save in a tax-efficient way. Each tax year UK residents are entitled to an ISA allowance, which is the total they can invest in to an ISA during the tax year. There is no income tax or capital gains tax to be paid on the investment returns.  There are four main types of ISA:

  1. Cash ISA
  2. Innovative finance ISA
  3. Lifetime ISA
  4. Stocks and shares ISA.

The government sets the allowance limits for each tax year.


What is the ISA allowance for 2024/25? 

The ISA allowance for 2024/25 is £20,000.

You can use your allowance to invest in a cash ISA, a stocks and shares ISA , a lifetime ISA, an innovative finance ISA or any combination of the four. You are allowed to subscribe into multiple ISAs of the same type, with the exception of the Lifetime ISA, within the tax year. What this means is you can have more than one Stocks & Shares ISA or Cash ISA or Innovative Finance ISA but you can still not exceed the overall ISA allowance. You can have a mixture of ISA types as long as the overall ISA allowance is not exceeded.


What's a Cash ISA? 

Cash ISAs are savings accounts. You'll receive a rate of interest on your savings which we pay you 'gross', so your returns are tax-free.


What's a Lifetime ISA? 

The Lifetime ISA is designed to help you save for a first home or for your retirement at the same time. Note the following apply:

  1. You can open a lifetime ISA if you're aged 18 to 39
  2. You can save up to £4,000 tax-free in each year up to the age of 50
  3. The government will pay a 25% bonus on these contributions, up to £1,000 a year
  4. You can use some or all of the money to buy your first home, and/or you can keep it in the lifetime ISA to help fund your retirement. You can access it without charge from the age of 60


What's a Stocks and Shares ISA?

Stocks and Shares ISAs are a tax-efficient umbrella under which you can invest in unit trusts. This means you have no further tax to pay on your investment returns. And unlike most investments you don't need to record your ISAs in your annual tax return.


What are Additional Permitted Subscriptions? 

APS is an additional allowance independent of the normal annual ISA allowance which is available to the surviving spouse or civil partner of an ISA investor who died on or after 3 December 2014. It is equal to the value of their partner's ISA at the time of their death.. The APS allowance is not something that can be transferred to another person. It is to be used solely by the spouse / civil partner of the deceased. If there is no surviving spouse / civil partner there is no APS allowance.


What's a Unit Trust? 

Unit trusts are collective investments. This means your money is pooled, along with other investors’ money, into a fund called a unit trust. They are medium to long term investments. You should try to keep your money invested for five years or more.