Understanding ISAs: A Comprehensive Guide for UK Investors

What is an ISA, and is it right for me?

An Individual Savings Account or 'ISA' is one of several types of 'tax wrapper' available in the UK. Tax wrappers are types of accounts that allow UK residents to save and invest in a tax-efficient manner.

In the context of ISAs, tax efficiency means that any returns on savings and investments held in your ISA will not attract tax, provided you do not exceed the government-set annual ISA allowance. The annual ISA allowance for the current tax year is £20,000. More detail on how this allowance can be used can be found later in the guide.

ISAs offer a versatile approach to saving and investing. There is a wide range of options to choose from, with many banks and financial service providers offering Cash ISAs, Stocks and Shares ISAs and Lifetime ISAs (LISAs). Some also offer innovative finance ISAs (IFISAs). We will explain the differences later in this guide. 

To open an ISA you must be over 18, and a resident of the UK. If you're not a resident in the UK but are a member of the armed forces or a Crown servant (for example diplomatic or overseas Civil Service) or their spouse or civil partner, you can also open one. 

Note: Both LISAs and IFISAs have additional features you should be aware of, which we touch on later in this guide.

Additionally, a Junior ISA (JISA) can be set up by a parent or guardian for children under the age of 18. JISAs have a separate tax allowance of £9,000 per tax year that does not count towards the £20,000 annual allowance for other types of ISAs.

We have a separate page with information on this type of account.

What is the difference between a Cash ISA and a Stocks and Shares ISA?

ISA accounts can generally either be Cash ISAs or Stocks and Shares ISAs.

• A Cash ISA will keep your savings in cash, which may earn interest. 
• A Stocks and Shares ISA gives you the opportunity to invest in shares or bonds, or other eligible securities. It's important to remember that investing carries both the potential for capital gains and – especially over shorter periods – the risk of loss, which is why we recommend an investment timeframe of at least three to five years.

Returns generated in both types of ISAs are not subject to income tax or capital gains tax.

Like regular savings accounts, ISAs can be either:

• Easy access – money can be withdrawn at request, although there may be limits on the frequency of withdrawals, or how much you can take out. Unless an ISA is explicitly 'flexible' (this should be clear in the terms), if you withdraw funds from the account in the same tax year they were contributed, that withdrawn part of your annual allowance remains used. Be careful to check how much of your annual allowance you have available before you top up or after you withdraw. 
• Fixed-term – you deposit a lump sum at the outset for a set period – agreed in advance – often for one, three or five years. Withdrawals before the fixed term is up are either not allowed or only with an accompanying penalty charge. 
• Notice accounts – you can request a withdrawal any time, but the provider needs time before it can return the money. The length of time is often around 30-90 days (but can be more) and is agreed when you open the account. 

Tax benefits

Investing in a Stocks and Shares ISA offers three main tax advantages.

1. You don't pay tax on dividends from shares.
   All dividend income inside your Stocks and Shares ISA remains tax free. In comparison, for earnings outside an ISA, for the current tax year, only your first £500 of dividends earned in the tax year are tax free. Beyond this allowance, you pay tax on dividends depending on your income tax band: basic-rate taxpayers pay 8.75%, higher-rate taxpayers pay 33.75%, and additional-rate taxpayers pay 39.35%.
   
2. You don’t pay Capital Gains Tax (CGT).
   Any gains on investments within your Stocks and Shares ISA are not subject to CGT. Outside a Stocks and Shares ISA, the CGT allowance is £3,000 for the current tax year. So, if you’ve got investments outside an ISA, you’ll pay tax on any profits above this threshold: basic-rate taxpayers pay 18%, higher-rate and additional-rate taxpayers pay 24%.
   
3. You don’t pay tax on interest earned.
   All interest earned from interest-bearing investments in your Stocks and Shares ISA is not liable to income tax. These investments may include corporate bonds and gilts.
   

If you have a Cash ISA, all interest earned in the ISA is tax free. J.P. Morgan Personal Investing do not provide Cash ISAs.

We have written a detailed guide on tax efficient investing which you can find here.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with us can go down as well as up and you may get back less than you invest. Tax rules vary by individual status and may change. This is general information, not personalised tax advice. ISA/JISA/LISA eligibility rules apply. J.P. Morgan Personal Investing is a J.P. Morgan company which offers investment products. Investments not guaranteed by JPMorgan Chase Bank, N.A.