What is an ISA? Our guide to Individual Savings Accounts

by Leeds Building Society

An Individual Savings Account, or ISA, is a savings account where you can earn tax-free interest subject to various conditions.

38% of UK adults have one. In this guide, we'll tell you everything you need to know about ISAs.

How do ISAs work?

ISAs were introduced in 1999 to replace tax-exempt special savings accounts and personal equity plans. There are different types of ISAs to suit a range of savings ambitions, and the way they operate can differ between the different product types.

How much can you put into an ISA?

You have an ISA allowance of £20,000 (£9,000 for Junior ISAs) each tax year. This is the amount of money you can save or invest without paying tax on the interest you earn.

That means between 6 April this year and 5 April next year, you can save up to £20,000 and not pay any tax on the interest you earn. Once the new tax year starts, your allowance refreshes and you can save up to that amount again.

Are ISAs completely tax-free?

You'll only ever pay tax on an ISA if you exceed your savings allowance of £20,000. How much tax you pay on money saved above your allowance will depend on the tax rate you pay:

  • Basic-rate taxpayers: 20%
  • Higher-rate taxpayers: 40%
  • Additional-rate taxpayers: 45%

Bear in mind that if you’re a basic-rate taxpayer, you also have a personal savings allowance (PSA) that allows you to earn up to £1,000 of interest tax-free. You'll need to ensure you don’t exceed this, otherwise you’ll start paying tax on your interest.

Higher-rate taxpayers get a PSA of £500. Those on the additional rate don't receive a PSA, so will pay tax on any money saved beyond their ISA allowance.

How many ISAs can I have?

You can have as many ISAs open at the same time as you want, but you can only pay into one of each type per tax year. Your ISA allowance applies across all ISAs you hold.

For example: you might have a Cash ISA and a Stocks and Shares ISA. But you don't get a £20,000 allowance for each one.

Is my money safe in an ISA?

Every type of ISA, barring Innovative Finance ISAs, is protected by the Financial Services Compensation Scheme (FSCS) which covers a maximum of £85,000 per building society, bank or credit union. You may seek independent financial advice to find out what suits your individual circumstance.

Who can open an ISA?

To open an ISA, you need to be:

  • A UK resident – or crown employee (or their partner) if you don't live in the UK
  • 16 or older for a Cash ISA
  • 18 or older for a Stocks and Shares ISA or Innovative Finance ISA
  • 18-39 for a Lifetime ISA
  • A parent or guardian to someone under 18 for a Children's/Junior ISA.

Types of ISA

What is a Cash ISA?

Cash ISAs offer much of the same functionality as a regular savings account, but with the addition of the tax-free ISA allowance. Tax treatment depends on individual circumstances and may change in the future. There are three primary types of Cash ISA:

  • Fixed Rate Cash ISAs give you a fixed rate of interest on your savings that won't change for a set duration. You'll typically get a higher rate of interest than you would with variable rate accounts. There are cash withdrawal restrictions when it comes to Fixed Rate Cash ISAs, and withdrawals can lead to a loss of interest.

  • Limited Access ISAs allow you to make a set number of cash withdrawals a year. If you go over this number, you'll could lose out on some interest. Limited access accounts tend to come with a variable rate of interest.

  • Instant Access ISAs allow you to make unlimited withdrawals. Typically offering a variable interest rate.

Take a look at all of our Cash ISAs or how ISAs work.

What is a Stocks and Shares ISA?

With a Stocks and Shares ISA, you can put your money in all sorts of investments, including shares, funds, trusts, and bonds.

With a Stocks and Shares ISA the value of investments can go down as well as up.

What is a lifetime ISA?

Lifetime ISAs are government-backed ISAs for people aged 18-39 to save for their first home or retirement tax-free. With a Lifetime ISA, you can save up to £4,000 each year and earn 25% interest on whatever you put in.

You can only open one Lifetime ISA, but you can keep putting money into it until you're 50. You can access the money whenever you like, but you'll only receive the 25% bonus if you use your funds towards your first home or retirement after you turn 60. Take it out for anything else and the government will take back 25% of the total pot.

What is an Innovative Finance ISA?

Innovative Finance ISAs are a type of ISA that offers a tax-free wrapper to savings income from peer-to-peer loans, crowdfunding debentures, and cash investments. Because they're investments made outside of financial institutions, they don't receive FSCS protection. 

What is a Junior ISA?

A Children's or Junior ISA allows you to save money for your child until they're 18. They work like normal ISAs – for example, you can choose a Cash ISA or Stocks and Shares ISA – but the tax-free allowance is lower at £9,000. You'll need to open the account on behalf of your child as their parent or guardian.

Choosing the right ISA

With different ISAs to choose from, picking the right one can be a little daunting.  By considering the following, you might get more of an idea of which ISA right be right for you.

  • Access: Different ISAs have different restrictions, knowing how often you'll need to access your money should help narrow down your options. For example, if you can put money away for the foreseeable future without touching it, a fixed rate over a long term might be best for you.

  • Duration: Most ISA types give you different options when it comes to duration, so by deciding how long you’re prepared to save for, you can narrow down which accounts suit your needs.

  • Risk: Stocks and Shares ISAs are a risk vs reward saving option. You might lose some of your money if your investments don't pan out the way you hoped, but the returns can be greater if things do go to plan. If you'd rather steer clear of any risk, an option like a Cash ISA safeguards your money while offering a steadier rate of growth for your savings. Tax treatment depends on individual circumstances and may change in the future.

  • Existing ISAs: You can only put money into one of each type of ISA each year. So, if you’re already using an ISA, you might want to look at another type of ISA so you can continue to save and benefit from your ISA allowance.

Is an ISA for you?

Now you know more about ISAs, could one be the solution for your savings? You can take a look at our Cash ISAs or compare our full savings range.

Got a question? Contact us and we'll do what we can to help.


Leeds Building Society. No reliance should be placed on this guide. We recommend that you seek independent legal advice and/or financial advice if you have any questions or queries.

Cash ISAs are available to individuals aged 16 or over who are resident in the UK for tax purposes.