UK Individual Savings Accounts

An Individual Savings Account (ISA) is a tax-free savings account available to UK residents. If you save in an ISA you keep all of your investment return, and pay no tax on it. In contrast, interest and dividends you receive from banks, building societies, and a general investment account with a broker are all taxable.

The government introduced ISAs on 6 April 1999, and they will be around for the foreseeable future. You can start with small amounts and save up to £20,000 in the tax year 2022-23. A tax year runs from 6 April to 5 April in the following year.

Introduction
There are two main types of ISA: a cash ISA in an interest paying bank or building society account; and a stocks and shares ISA, invested in bonds, stocks, or funds such as unit trusts, OEICs, ETFs, and investment trusts, held at a broker or investment platform.

Beside a regular ISA, there are also ISAs that address particular situations: a Junior ISA (JISA); a Lifetime ISA (LISA); and an Innovative Finance ISA (IFISA).

Junior ISAs are intended for children, and can be either cash ISAs or stocks and shares ISAs. To qualify, a child must:
 * be younger than 18 years of age, and
 * live in the UK, and
 * cannot be entitled to a Child Trust Fund (CTF) account. Most children born between 1 September 2002 and 2 January 2011 did qualify for a CTF. Beginning in April 2015, you can convert Child Trust Funds into Junior ISAs.

Lifetime ISAs are intended for either retirement saving or saving for a home. The Government adds a 25% bonus to contributions, but unlike other ISAs, you can make Lifetime ISA withdrawals without penalty only after age 60 or when buying a first home. To qualify, you must:
 * be older than 18 years of age and under 40 years of age, and
 * live in the UK.

Innovative Finance ISAs are a special type of ISA, and may contain only peer to peer loans, crowdfunding debentures, and cash. As of 2022, only the main UK peer to peer lending platforms offer these.

Contribution limits
In the tax year 2022-23, which ends on 5 April 2023, you can put up to £20,000 into ISAs. Within this overall limit, you can pay into each type of ISA in the tax year in any combination of amounts.

So, for example in 2022-23, you could put:
 * £10,000 into a cash ISA and £10,000 into a stocks and shares ISA, or
 * £3,000 into a cash ISA and £17,000 into a stocks and shares ISA, or
 * £4,000 into a Lifetime ISA, £3,000 into a cash ISA and £13,000 into a stocks and shares ISA, or
 * £2,000 into a Lifetime ISA, £4,000 into a cash ISA, £5,000 into an Innovative Finance ISA and £9,000 into a stocks and shares ISA, or
 * Nothing into a cash ISA and £20,000 to a stocks and shares ISA, or
 * £20,000 to a cash ISA and nothing to a stocks and shares ISA.

Cash ISA features
A cash ISA is just a tax-sheltered wrapper around a normal bank or building society savings account. However, most banks and building societies will offer slightly different interest rates for ISA and non-ISA savings accounts, with the ISA rate usually being the lower of the two.

A cash ISA may be 'flexible', in which case you can take money out and replace it within the same tax year and without reducing that year's ISA allowance. Not all cash ISAs are 'flexible'.

Junior ISA features
The annual contribution limit for a Junior ISA for tax year 2022-23 is £9,000 per child per tax year.

The account is held in the child's name. A parent or guardian can open and manage the account. A child aged 16 or 17 can open their own ISAs. Anyone can contribute to a child's Junior ISA up to the annual limit.

The child cannot make any withdrawals until they are aged 18 (although there is an exception for terminal illness or death). At 18, the ISA converts into a regular ISA, under the child's control. A Junior ISA has all of the same tax advantages as a regular ISA.

Lifetime ISA features
The annual contribution limit for the tax year 2022-23 is £4,000 per tax year. You can make contributions up to age 50. The Government adds a bonus of 25% of your contributions, up to a limit of £1,000 per year.

Withdrawals are penalty free if you use them to buy a first home, or if you are aged over 60. Otherwise, the government applies a 25% early withdrawal penalty. A Lifetime ISA has all of the same tax advantages as a regular ISA.

Tax considerations
You pay no tax on any of the income you receive from your ISA savings and investments. This includes dividends, interest and bonuses. You also pay no tax on capital gains arising on your ISA investments. You cannot use losses on ISA investments to reduce your Capital Gains Tax on capital gains outside your ISA.

The insurer does not have to pay tax on income and capital gains on investments used to back your ISA life insurance policies. You do not have to pay any tax when the policy pays out.

For regular ISAs, you can take your money out at any time without losing tax relief. For Junior ISAs and Lifetime ISAs, you can take money out without penalty provided you meet the age related and other exemptions.

You do not have to declare income and capital gains from ISA savings and investments, or even tell HMRC that you have an ISA. An ISA is entirely unencumbered by UK tax.

Non-UK tax
If you are thinking of moving outside the UK, or if you are a foreign national working temporarily in the UK, you need to consider that most countries do not honour UK ISA tax-free wrappers, but instead treat an ISA as an ordinary unwrapped saving or general investing account.

Outcomes range from none, for example if you move to a country without an income tax such as the UAE, through to draconian, such as where the ISA holds funds or ETFs that run into problems with the US's PFIC tax regime. This can argue for avoiding Lifetime ISAs, and also for cashing in a regular ISA entirely before leaving the UK.