An ISA is a type of savings account in the UK, and stands for Individual Savings Account. There are two types: cash ISAs and stock and share ISAs. What makes them so popular is that cash ISAs let you save without having to pay any income tax on the interest earned. With a stocks and shares ISA, you don’t pay any personal tax on any income received or increase in value of your investment.
A cash ISA is very similar to a savings account, except that it allows you to earn money tax free. There are a lot of different types of cash ISA offers available, so make sure that you find one that suits your needs. For example, there are cash ISAs that have variable interest rates and different types of access, so make sure that you find one that allows for easy access without losing any interest.
There are also cash ISAs that allow you to put your money away for between 1 to 5 years, and earn a fixed interest rate.
Just remember that the most you can contribute to a cash ISA each year is £5,640, with a total amount of £11,280 in total ISA contributions each year.
Stocks and Shares ISA
A stocks and shares ISA is another option that is designed for longer term investment. It is designed to invest in the stock market, but since it is in an ISA, you get a tax efficient investment. However, it is important to remember that since this money is invested, it can go up as well as down depending on stock market conditions. You could get back less than you invested originally.
You can actually invest more in a stocks and shares ISA than you could in a cash ISA. The limit in a stocks and shares ISA is the maximum allowance of £11,280. However, if you invest this maximum amount, you cannot invest anything in a cash ISA. You can split your investment between a cash and stocks and shares ISA, but you cannot exceed either the cash ISA limit, or the total limit overall.