Isa basics: all you need to know

All you need to know about how Isas work, including how much you can pay in, what you can hold, and how to transfer an Isa.

A piggy bank
(Image credit: © Getty Images/EyeEm)

The individual savings account (Isa) is a flexible way to save and invest that can bring large tax benefits, especially for higher earners. However, the rules can seem complicated at first. Here's what you need to know.

What is an Isa?

An Isa is a special type of tax-efficient account. It's not an investment in itself, it's more like the "wrapper" that goes around your savings and investments to protect them from the taxman. As the rules currently stand, an Isa allows you to save or invest up to £20,000 every year and pay no tax on capital gains, interest and dividend income within the account. You don't get tax relief on your contributions, but your money can be withdrawn at any time without paying tax. This makes Isas different from pensions, where you get a tax break on contributions, but are taxed when you take it out.

What types of Isa are there?

There are several main types of Isas.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Cash Isas are tax-free savings accounts and are provided by banks and building societies.

Stocks and shares Isas allow you to invest in stocks, bonds, funds and some other investments and are provided by stockbrokers and fund supermarkets.

The Innovative Finance Isa allows you to invest in peer-to-peer lending with an Isa wrapper.

Help-to-Buy Isa, which is aimed at first-time buyers who are trying to build up a deposit for their first flat or house. The government tops up your savings by 25%, up to a maximum of £3,000. You can only save up to £2,400 a year in a Help to Buy Isa.

The Lifetime Isa is meant to help you buy your first home or save for retirement. It is only available to those under 40. You can put in £4,000 a year until you are 50, and the government adds a 25% bonus up to a maximum of £1,000 a year.

Can I have more than one Isa?

You can split your annual £20,000 contribution between the different types of Isa in whatever proportion you like. However, you can only contribute to one of each type of account at a time in each tax year (although some providers now offer "split" Isas with a variable rate and a fixed-rate cash Isa in the same account). You can keep previous years' Isas open, transfer them to new providers and change the investments you hold in them. There are extra rules for Help-to-Buy and Lifetime Isas, but essentially they are a type of cash Isa.

How do I transfer my Isa?

You can transfer your Isa between different providers as many times as you want without it reducing your annual allowance. So if you put £15,000 into a cash Isa last year and want to move it to a new bank with a better interest rate, you can do that and also pay £20,000 into a new Isa this year as well. You can also in theory move money freely between cash Isas and stocks and shares Isa. An Isa provider can't stop you transferring out, but they can insist only the whole account is transferred and charge transfer fees for investments and they are not obliged to accept transfers in. However, if you want to move your Isa, you must make a formal transfer request through the provider you are moving to. You can't just take the money out to pay into the new provider, because that counts as a withdrawal.

What are the rules for withdrawals?

The old rule was that you can take your money out of an Isa at any time, but you lose that part of your allowance (in other words, you can't pay it back in again without it counting as part of your contribution for the current tax year). But in April 2016 the rules became more flexible and some Isas will allow you to take out and pay back money within a tax year (but not take it out in one tax year and pay it back in another). However, providers do not have to offer this flexibility on their accounts, so check the rules and accounts terms very carefully. Help to Buy and Lifetime Isas have stricter rules, however.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri