Last updated in September 2020
Learn where to put your ISA allowance. An individual savings account (ISA) is a form of investment vehicle in the UK that is exempt from tax. They offer an attractive incentive for UK residents to save more money.
However, there are different types of ISAs. Choosing the right one can be confusing and even put you off investing. This post aims to provide you with a simple overview of the ISA types and explain which one you should choose depending on your goals.
Monethalia does not offer financial advice. Should you take any action based on the information provided, Monethalia will not be liable for the outcome.
Table of Contents
Where to put your ISA allowance
What is your ISA allowance?
An ISA is a tax wrapper that allows British residents to save money without paying tax on the return. The allowance is set by the government and currently is £20,000. This means between the sixth April of the current year and the fifth April of the following year, you can allocate £20,00 to your ISAs.
Your ISA allowance renews every year. If the regulation does not change, this means you can put £20,000 in your ISA next year again, and in the year after. Within a tax year, you can pay into different ISAs, as long as they are not of the same type.
Within a tax year, you can pay £12,000 into a cash ISA and £8,000 into a stocks and shares ISA. In the next tax year, you can pay £10,000 into a cash ISA and £10,000 into a stocks and shares ISA.
Within a tax year, you can pay £8,000 into your cash ISA and open an innovative finance ISA in which you can put £12,000. In the next tax year, you can close your innovative finance ISA again and pay £20,000 into your cash ISA.
What if you accidentally contribute to two ISAs of the same time?
There is no need to panic if you have accidentally paid into two ISAs of the same time. You can easily resolve this by calling the ISA helpline on 0845 604 1701.
Cash ISAs, stocks and shares ISAs, and innovative finance ISAs are only some of the ISA types. There are also some others you may take into consideration:
The cash ISA is the most well-known ISA type. With the cash ISA, your savings are held in cash, meaning the money is not invested into anything. You can imagine the cash ISA as a regular savings account.
Typically, you earn interest on your savings held in a cash ISA but this is not enough to counter inflation. Thus, if you leave your money in a cash ISA, you will lose money over time (around 1% per year depending on your interest rate and inflation).
A help-to-buy ISA, also called H2B ISA, is a variation of the cash ISA intended for first-time buyers. Your money is still held in cash form with an interest attached to it. However, unlike a cash ISA, you can only contribute £1,200 when opening the account and £200 per month following this.
When it is time to buy your first home, the government will give you a 25% bonus on the savings in your help-to-buy ISA up to a sum of £3,000 (if you have £12,000 in savings). But you also need to keep in mind that there are restrictions on the type of house you can buy. Specifically, the house must be:
- in the UK
- priced up to £250,000 (or up to £450,000 in London)
- the only home you will own
- where you intend on living
- purchased with a mortgage
The help-to-buy ISA scheme is now closed. If you have already opened a help-to-buy ISA, you can continue to save in it until November 2029 and claim the bonus until December 2030.
Innovative finance ISA
An innovative finance ISA (IF ISA) is an investment ISA. It is used to invest in peer-to-peer (P2P) lending. P2P lending means lending money to another person without involving a bank. Because there is no bank involved, you will get higher interest rates from the money you lend to another person. Equally, borrowers can lend at lower costs.
Because the innovative finance ISA is an investment ISA, you can make as well as lose money. However, you will also gain more interest than you would with a cash ISA which should be higher than the inflation rate.
A junior ISA is as the name implies and ISA intended for children and teenagers under the age of 18. Instead of £20,000, junior ISA’s have a limit of currently £9,000 per year. Note that this may change in future tax years.
Junior ISAs can be either cash or stocks and shares ISAs which means they can hold either cash savings or stocks or shares. Your child can have one ISA of each type but you cannot go over the maximum allowance.
A lifetime ISA (LISA) is another scheme to encourage you to save money. The money saved in a lifetime ISA can be used for your pension or to purchase your first home and you can either invest in stocks or shares or hold your lifetime ISA savings as cash.
You can save up to £4,000 per year in your lifetime ISA and the government will give you a bonus of 25% up to £1,000. Theoretically, it is possible to add more money but you will not get a bonus for this. Thus, the lifetime ISA enables you to build up your savings quickly.
On the downside, you can only withdraw from your lifetime ISA if you buy your first home worth up to £450,000 or after the age of 60.
Stocks and shares ISA
With the stocks and shares ISA, you can invest in stocks and shares, as the name implies. Thus, you can gain money as well as lose money. Typically, the gains from a stocks and shares ISA are greater than with a cash ISA but the associated risks are also higher.
Which ISA should you use?
The type of ISA you should put your ISA allowance in depends on your goals. Do you want to
- build an emergency or sinking fund? Cash ISA
- store cash for a short amount of time? Cash ISA
- save for a house deposit? H2B ISA (if you already have opened one) or LISA
- save for your pension? LISA
- set up your children with some money? Junior ISA
- retire early? S&S ISA
- invest some spare cash? IF ISA or S&S ISA
Where to put your ISA allowance summary
There are several different types of ISAs available for British residents, each with its own advantages and drawbacks. In particular, you can choose one or more from the following:
- Cash ISA
- H2B ISA
- Innovative finance ISA
- Junior ISA
- Lifetime ISA
- S&S ISA
These ISAs serve different purposes according to different savings needs. By choosing the right ISA, you can maximise your savings and make the most of your money.
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