Planning to save money for your future? Have you been told to open an ISA? Not entirely sure what that is? Well, you’re in the right place.
Here, we explain everything you need to know about ISAs, from what they are and how they work, to the main features and frequently asked questions.
Ready? Let’s crack on!
What actually is an ISA?
ISA stands for “Individual Savings Account”, and it allows you to save and invest money in the UK without having to pay tax on any of the money you make.
By saving money in a savings account, you’ll be paid interest for keeping your money there. And when investing your money, your money grows over time as the value of your investments grow. We’ll dive deeper into what these actually mean later, but with an ISA you don’t have to pay tax on the interest you get, or on the growth of your investments at all. It’s quite a big deal!

So, what’s the story with ISAs? Well, they’ve been around for a while. The Government first introduced them back in 1999 to encourage people to save for the future. Two decades on and you’ve now got 4 types of ISA to choose from for yourself: Cash ISAs, Stocks & Shares ISAs, Lifetime ISAs, Innovative Finance ISAs, and an extra 1 if you’ve got kids – Junior ISAs.
Let’s dig into each type of ISA in a little more detail…
Types of ISAs
Cash ISA
This is the most basic type of ISA. You simply put your cash into your ISA and it earns interest, tax-free. Easy-peasy.
You get Cash ISAs as either a fixed rate (meaning the interest rate stays the same for a certain length of time) or a variable rate (which can go up or down).
A fixed-rate Cash ISA gives you a higher interest rate than a variable rate, but you’ll have to lock your money away for between 1 and 5 years, that means you’ll be putting it in your ISA account and can’t touch it again — and the longer you lock your money away, the higher the interest rate you can get.
Stocks & Shares ISA
Also known as an ‘Investment ISA’, a Stocks & Shares ISA lets you invest your money instead of saving it. You can invest in various stocks & shares, bonds, or funds to help your savings grow faster.

Stocks and what now?
- Stocks & shares: This is where you buy an ownership stake in a business (meaning you will own part of the company), called a share. Shares are traded all over the world on stock exchanges, and their value will depend on the total value of the company (normally the company value depends on how well they are doing as a business).
- Bonds: Buying bonds lets you effectively loan your money to a company or government and receive interest payments on the amount loaned (similar to a loan you get from a bank). The bond will also have a date they mature, which is when the loan amount will be repaid, with interest.
- Exchange-traded funds (ETFs): these are shares of many companies grouped together to create a fund. Your money will buy a share of the fund instead of each individual company. For instance, a fund could consist of the top 100 companies in the UK. They are traded on stock exchanges, just like shares.
When you invest in a Stocks & Shares ISA, your ISA provider (the company that looks after your ISA), will work with an investment fund to manage and invest your money sensibly and safely.
The investment fund will split your money between stocks & shares, bonds, and exchange-traded funds (ETFs) to grow your money over time. And over time, your savings will grow, and that money is, you guessed it, entirely tax-free!
As a long-term saving strategy, a Stocks & Shares ISA is a no-brainer. They almost always outperform Cash ISAs (which currently have low interest rates). Here’s a more in-depth comparison of Cash ISAs vs Stock and Shares ISAs.
Lifetime ISA
If you’re a young gun, over 18 and under 40 (hey, 40’s the new 30), and you’re eyeing up a first-time property purchase, a Lifetime ISA could be just what you need.
You can save up to £4,000 a year, tax-free, and the Government adds a 25% bonus to anything you pay in until you turn 50. That means if you manage to save the full whack of £4,000 per year, the Government will give you an extra £1,000 per year, for free. Jackpot!
Of course, the Government isn’t handing out cash willy-nilly. There are rules! A Lifetime ISA is designed to help you buy your first home or save for your retirement, so you can only withdraw the money for those reasons (without paying a hefty charge of 25% to withdraw otherwise).
Lifetime ISAs can be either a Stocks and Shares Lifetime ISA, or a Cash Lifetime ISA. Both act just the same as a regular Stocks and Shares ISA or Cash ISA, but you get the 25% Government bonus too!
If you’ve already bought your first home, or you’ll need the money before you turn 60, there’s no real benefit to opening a Lifetime ISA. You’d be better off saving your money in another type of ISA – our recommendation is a Stocks and Shares ISA.
Innovative Finance ISA
Instead of saving cash or investing in stocks & shares, an Innovative Finance ISA lets you lend your money to borrowers (individuals or businesses) – called peer-to-peer (P2P) lending.
Peer-to-peer lending is an alternative to borrowing money from a bank, and it’s often used by people looking to grow their businesses. Funding Circle is a good example of a popular lender.
Over time, the borrowers pay the money back, plus fees and interest. And, like the other ISAs we’ve covered, the interest you earn is completely free from tax!
Junior ISA
The 4 ISAs listed above are for your own savings. But if you want to open an ISA for your children, younger than 16, you can! A Junior ISA (JISA) lets you, as a parent or guardian, save for your nipper’s future. A JISA locks the cash away until your kid’s 18th birthday, after which it’s their money. Whether you tell them about it or not is up to you! Fast car anyone?

You can choose to save into a Junior Cash ISA or a Junior Stocks & Shares ISA (or split the money between the two).