What is an ISA and how do you invest in it?

What is an ISA?

An ISA, or Individual Savings Account, acts as a protective layer for some of your investments. This wrapper helps you avoid having to pay tax on dividends, interest and more.

The government typically sets a maximum allowance of £20,000 that can be placed in your ISA in a given tax year.

In 2023, the HMRC (His Majesty’s Revenue and Customs) announced numerous rule changes to ISAs for the 2024/25 tax year and beyond.

Mandatory changes for providers

1. If you’re under the age of 18, you can’t subscribe to multiple cash ISAs (note that we don’t offer cash ISAs)
2. As with lifetime ISAs, investors will now be required to have a National Insurance Number (NINO) to open any type of ISA

Optional changes for providers

1. You can now hold multiple ISAs of the same type (excluding lifetime and junior ISAs), but you’ll still need to stick to the £20,000 cap
2. If you hadn’t invested in your ISA in the previous tax year, you no longer have to make a fresh application
3. You can transfer just a portion of your funds to another provider instead of the full amount
4. Long-term asset funds can now be held in an innovative finance ISA (excluding lifetime and junior ISAs)

Of the optional updates, our share dealing and Smart Portfolio ISAs will adopt rules 1-3.

Here’s a breakdown of the different kinds of ISAs available to UK citizens:

Cash ISAs

Cash ISAs are relatively simple and act like savings accounts. Your funds will be held in cash and earn interest, tax free. There are flexible cash ISAs available too, which allow you to withdraw money and add it back in. However, cash ISAs typically have interest rates lower than inflation, so you may want to invest in other ISAs as well.

Stocks and shares ISAs

With a stocks and shares ISA, you can invest your money in the stock market. This increases the potential returns as well as the potential risk as the stock market can be volatile and unpredictable. Some ISAs, like our share dealing ISA, also give you full control of your account, allowing you to choose which shares your money is invested in.

Our share dealing ISA and Smart Portfolio ISA are flexible. One of the key benefits of this is that you can withdraw your funds as many times as you need to in a single tax year, and reinvest them later – all without impacting your overall allowance.

For instance, if you invest £12,000 in one tax year, you’d have £8,000 remaining of your overall allowance for that year. Say you withdraw £4,000 and later reinvest the same amount; you’d still have room to invest £8,000 more.

Innovative finance ISAs

Using an innovative finance ISA loans your capital to individuals and businesses without the need for a middleman. These accounts tend to earn higher interest rates than other savings accounts. However, your capital is at risk because these lending schemes can collapse and aren’t protected by an external financial authority.

Lifetime ISAs

Lifetime ISAs are built to help you save for important elements of your future, like buying your first house or your eventual retirement. You can only open one if you’re under the age of 40 and you’re limited to investing £4,000 of your yearly tax-free allowance into this kind of account. However, the government will add a 25% bonus of what you pay in, every year.

Junior ISAs

You can save and invest for your children more efficiently with a junior ISA. These accounts were introduced to replace Child Trust Funds and can be opened by the parent or legal guarding of any child under the age of 18 years. The government-stipulated allowance for these is £9,000, and the child in question can only withdraw the money when they turn 18.

How do ISAs work?

An ISA works similarly to other bank accounts, enabling you to set aside some of your money. You entrust your capital with a financial institution in the hopes that it will grow. However, unlike other accounts, your ISAs will not be subject to tax. This protects any capital gains you might make.

You can open an ISA with organisations, such as:

• Banks
• Building societies
• Friendly societies
• Credit unions
• Stockbrokers

Depending on the institution you choose, different kinds of ISAs will be available to you. You can opt to put your entire allowance into one or spread it across several different accounts.

For example, you may choose to put £10,000 into a stocks and shares ISA and another £10,000 in a cash ISA. You can also split your contributions between multiple accounts of the same type held with different providers – excluding lifetime and junior ISAs.

If you don’t use this allowance before the tax year ends, it won’t roll over. However, it’s important to note that tax rules are subject to change and depend on your individual circumstances.

How you deposit funds into or top up your ISA will also depend on your providers. Many enable you to complete these transactions online if your funds remain within the government allowance. Some grant you further flexibility to deposit or withdraw your funds at any time.

Transferring your ISA from one institution to another is also possible. To transfer your ISA to us, you’ll need to invest via the IG Invest app or open a web-based share dealing account. Then, fill out our online transfer request form and we’ll take care of the rest. Usually, it’ll take about 14 days, but this depends on your transferring broker. With the new rules announced in 2023, you can also make a partial transfer to our stocks and shares ISA from another broker, provided they also adopt this change.

Why invest in an ISA?

There are several reasons why investing in an ISA might be worth your while. First and foremost is that they shield some of your money from taxation. This means that any interest or capital gains earned by your money won’t be affected.

ISAs can also be flexible. Depending on which kind you invest in, you’ll be able to deposit, withdraw and transfer a portion or all of your capital as needed.

You may also have greater control of how your money is put to work – selecting which stocks to invest in or which companies to lend to.

While the current annual allowance is only £20,000, this amount does renew every year.

What is a cash ISA?

Cash ISAs enable you to earn interest on your savings, but your ability to withdraw your funds will be limited to certain times of the year. To invest in one of these, you need to be a UK resident aged 16 or older.

If you’re set on opening a cash ISA and focused on maximising your returns, you might choose to use a fixed-rate variation. You’ll only be able to transfer or deposit money into this account on specific dates or periods.

On the other hand, a variable or flexible ISA gives you the power to withdraw your funds at any time and then replace it within the same tax year without it counting towards your allowance.

Here are some of the pros and cons associated with investing your money in a cash ISA.

Pros of cash ISAs

• A profit is made through the interest earned on your holdings
• You’ll have easy access to funds to pay for unexpected expenses
• Your money and any interest you earn on it will be protected from tax
• Opening a cash ISA requires an initial investment of as little as £1

Cons of cash ISAs

• Not all cash ISAs allow you to withdraw your money whenever you want to
• They can be outperformed by equities over the long-term
• Interest rates are typically low, and often can’t keep up with the cost of living and inflation rates

Find out more about how to beat inflation

What is a stocks and shares ISA?

A stocks and shares ISA is also known as an investment ISA. These accounts form a protective layer around your portfolio against any tax.

To open a stocks and shares ISA, you’ll need to be a UK resident and 18 years or older.

Depending on your provider, you’ll be able to choose which equities you want to invest in or opt for a ready-made selection.

Let’s look at some of the pros and cons of stocks and shares ISAs.

Pros of stocks and shares ISAs

• Provides a tax-efficient form of investment, guarding your portfolio from taxation on capital gains and dividends
• There’s a wide range of assets you can invest beyond equities, like ETFs and bonds
• Offers the potential for higher returns than cash ISAs because of the volatile markets
• You can transfer your holdings to another provider if you’re unhappy with the performance or management of your current one

Cons of stocks and shares ISAs

• Your profits aren’t guaranteed
• The increased risk means that you could lose money and end up with less than you started
• If your provider manages your investments for you, their account fees might diminish any profits

How do you invest in an ISA with us?

Invest in a share dealing ISA via the IG Invest app or a web-based share dealing account:

1. Download the IG Invest app from the Apple App Store or Google Play Store or create a share dealing account online

2. Sign up in a few simple steps

3. Choose 'ISA' as your account type

4. Start investing in over 13,000 global stocks and ETFs

Download IG Invest app

Open share dealing account online

Alternatively, invest via a Smart Portfolio:

1. Open a Smart Portfolio with us and select 'ISA' as your portfolio type

2. Answer questions to determine your risk profile

3. We'll help you find a Smart Portfolio that matches your needs

4. Deposit funds and we'll invest them on your behalf

Costs and Fees

• Commission-free trading on all shares*

• 0.5%** forex conversion fee for international shares

• Custody fee of £8 per month (currently waived for new clients until May 2025)

*Other fees may apply.
** Increasing to 0.7% from 7 April 2025

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