Individual savings accounts (Isas) are a way of saving and investing without paying income tax or capital gains tax. An Isa is not an investment in itself, but a “wrapper” into which you can put cash or investments. Strictly speaking, you do not buy an Isa, but rather apply for an Isa wrapper and buy the investments that go into it, though many fund management companies do sell them as a package.
The annual allowance has gone up substantially over time. You can now set aside up to £20,000 in the 2018/19 tax year, and you can withdraw the money at any time, unlike a private pension, for example. This annual Isa allowance must be used before the end of each tax year (5 April), otherwise you will lose it.
You can open a cash Isa when you turn 16, but for all other types of Isa you have to be at least 18 years old. You also have to be resident in the UK for tax purposes.
The popularity of the Isa format has encouraged the government in recent years to release various new different types of Isa, most of which – confusingly – have different rules to the original Isa and arguably should be branded as something else altogether. Junior Isas, for example, are aimed at those who want to save on behalf of a child, but have a far lower annual allowance (currently £4,260 a year) and also ban withdrawals until the child turns 18.
• See Tim Bennett’s video tutorial: Why you need an Isa.