Types of ISA Explained

Whether you're looking to save for retirement, buy a home, or invest for long-term growth, an Individual Savings Account (ISA) is a no-brainer as it lets you save tax-free.

But choosing the right ISA can be confusing. Many people struggle to understand the variations between the different types of ISA, leaving them unsure of which one to invest in. Without the right guidance, you could miss out on great investment opportunities and the chance to maximise your annual tax-free allowance.

That’s where we come in. In this handy guide, we explain the different types of ISA and highlight the key features and benefits of each so you can feel confident in choosing the best ISA for your needs.

Individual Savings Accounts (ISAs) are tax-efficient savings and investment accounts available to UK residents or Crown servants and their spouse or civil partner. They allow you to save or invest money without paying tax on the interest, dividends, or capital gains that you earn within the account.

ISAs are long-term savings accounts that let you deposit funds and earn interest, dividends, or capital gains without paying a penny of tax on your earnings. There are five main types of ISA, including cash, stocks and shares, and lifetime ISAs.

You can hold multiple ISAs, but there are limits to how much you can put in an ISA. Each tax year, you can contribute up to £20,000 total across them.

While lifetime ISAs have their own £4,000 annual limit, they still count toward the £20,000 allowance. Junior ISAs, however, have a separate allowance of £9,000 per tax year. You could, for instance, deposit £10,000 in a cash ISA, £4,000 in a lifetime ISA, and £6,000 in a stocks and shares ISA, while separately depositing £9,000 in a junior ISA.

While cash and stocks and shares ISAs are typically more flexible with withdrawals, check your provider’s terms. Lifetime and junior ISAs usually have strict restrictions, which we’ll explain below.

*Uninvested funds held in your account may be protected in case of investment firm failure, not market losses.

Let’s explore each type of ISA in more detail.

A cash ISA provides a simple and secure way to grow your savings while earning tax-free interest. With no upper age limit, any UK resident or Crown servant and their spouse and civil partner over 18 can open one.

Cash ISAs are ideal for those not comfortable with investing, instead prioritising security and ease of access over potentially higher returns. Easy-access cash ISAs allow you to withdraw money when you need to, without facing a penalty—ideal for those who anticipate needing to dip into their ISA funds. Rates on these types of ISA are typically variable, meaning they can go up or down, depending on economic factors like the Bank of England’s base rates, inflation, etc.

If you’d prefer a guaranteed interest rate, you can lock your money away for a set period in a fixed-rate cash ISA, which is less flexible. When you open a fixed-rate ISA, you'll typically need to deposit your savings within 2-4 weeks (depending on provider terms). While providers must allow access by law, some fixed-rate cash ISAs require you to close or transfer the account to another provider to access your ISA funds, often with hefty penalties.

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These types of ISA are similar to cash in terms of eligibility, but the key difference is that instead of “resting” and earning interest in an account, your money is invested in the stock market. While you could end up with higher returns on investment (ROI), your balance could also decrease depending on market fluctuations.

As a result, stocks and shares ISAs are best for people who want to invest for the long-term—at least 5 years is usually recommended, as this gives your savings time to ride out any market dips.

Several providers offer stocks and shares accounts—for instance, the Legal and General ISA, Hargreaves Lansdown, and more.

Many of these provide the same service but with different investment options, such as stocks and shares or Exchange-Traded Funds (ETFs). Before opening an account, decide whether you want to select and manage your investments independently or if you’d feel more comfortable handing the reins to experts who can manage investments on your behalf.

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Lifetime ISAs differ slightly from other ISAs because they’re specifically designed for a first home deposit or retirement. If you withdraw your ISA funds for any other reason, you’ll face a penalty.

You can choose between a lifetime cash ISA or a lifetime stocks and shares ISA, depending on your risk appetite, but you can only open 1 new LISA per tax year (LISAs opened in previous years will still stay active). Plus, you can only contribute a maximum of £4,000 into your LISAs per tax year.

Similarly, the eligibility requirements are more rigid—you must be over 18 but under 40. For example, someone aged 60 will need to explore suitable ISAs for 60+ year olds.

LISAs typically offer high interest rates and a generous 25% government bonus of up to £1,000 each tax year (if you’ve contributed the maximum £4,000).

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An IFISA allows you to earn tax-free interest by lending your money through peer-to-peer platforms or crowdfunding investments.

Instead of saving with a bank or investing in the stock market, you lend directly to individuals or businesses, potentially earning higher returns. However, this comes with greater risk, as your capital isn’t usually protected by the FSCS.

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Junior ISAs are ideal for parents and legal guardians looking to invest in their children’s future. You can open either a junior cash or a junior stocks and shares ISA on behalf of your child.

With an annual contribution limit of up to £9,000, anyone can add money to the account, though only a parent or guardian can open it initially. The child must also be a UK resident, under 18, and not hold a Child Trust Fund (CTF). ISA funds are then locked away until the child turns 18, at which point, the JISA converts into an adult ISA and the child gets full access to the funds.

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The best ISA for you depends on a few factors:

There are technically five types of ISA: Cash, stocks and shares, lifetime, innovative finance, and junior ISAs. While the first four are available to any 18+ UK resident or Crown servant and their legal partner, the junior ISA is specifically for parents or guardians looking to save for their child’s future.

The best ISA will depend on your financial situation and savings goals. If you anticipate needing access to your ISA funds, an easy-access cash ISA would be ideal. However, if you’re saving for retirement, a lifetime ISA would be better. Research providers and their terms to uncover the best ISA for your needs.

Yes, you can put your money into more than 1 ISA type in the same tax year—for instance, a cash ISA and a stocks and shares ISA. However, you can only make fresh payments into 1 of each ISA type in a tax year, so you can’t put money into 2 cash ISAs in the same year. Moreover, your total contributions across all ISAs (except junior ISAs) must stay within the annual £20,000 limit.