What is an ISA and how does it work?

An Individual Savings Account (ISA) is a tax-efficient way to save or invest money. ISAs allow eligible UK residents to earn interest, investment growth and returns without paying UK Income Tax or Capital Gains Tax on those savings or investments.

For many people, an ISA is one of the most popular ways to save because it offers a simple and flexible way to make the most of your money while keeping your savings separate from tax.

What does ISA stand for?

ISA stands for Individual Savings Account.

Introduced by the Government in 1999, ISAs were designed to encourage people to save by allowing money to grow in a tax-efficient environment.

There are different types of ISA available, each designed to help savers and investors achieve different goals.

How does an ISA work?

An ISA works in a similar way to many other savings or investment accounts. You can pay money into the account and, depending on the type of ISA, either earn interest on your savings or invest your money for potential long-term growth.

The main difference is that ISAs offer tax advantages that are not available with many standard savings or investment accounts.

Each tax year, eligible individuals receive an ISA allowance. This is the maximum amount that can be paid into ISAs during that tax year.

You can choose to save all of your allowance into one ISA or split it between different eligible ISA products, subject to ISA rules.

What is the ISA allowance?

The ISA allowance is the maximum amount that can be deposited across eligible ISAs during a single tax year.

The allowance resets at the beginning of each new tax year, meaning any unused allowance from the previous year is generally lost and cannot normally be carried forward.

If you would like to learn more about annual ISA limits and allowances, see our guide: Understanding your ISA allowance.

Types of ISAs

There are several different types of ISAs available.

Cash ISA

A Cash ISA works in a similar way to a traditional savings account, allowing you to earn tax-free interest on your savings.

Cash ISAs are often chosen by savers looking for a lower-risk way to grow their money while keeping easy access to their funds or securing a fixed interest rate.

Stocks and shares ISA

A Stocks and Shares ISA allows you to invest your money in funds, shares and other investments.

The value of investments can go down as well as up, meaning you may get back less than you invested.

Innovative finance ISA

An Innovative Finance ISA holds peer-to-peer lending investments and other qualifying investments.

As with all investment-based products, returns are not guaranteed and your capital may be at risk.

Junior ISA

A Junior ISA is designed for children under the age of 18 and can help family members build savings for a child's future.

The money belongs to the child and can usually be accessed by them when they reach adulthood.

Can I have more than one ISA?

It is possible to hold multiple ISAs, provided you comply with the current ISA rules and do not exceed your annual ISA allowance.

Many savers choose to hold different ISA products to meet different needs, such as combining a Cash ISA with a Stocks and Shares ISA.

Can I transfer an ISA?

Yes. In many cases, you can transfer an existing ISA from one provider to another without losing the tax-efficient benefits that come with the account.

It is important to use the official ISA transfer process rather than withdrawing funds and opening a new account yourself, as this could affect the tax status of your savings.

Thinking about transferring an ISA to Hanley Economic?

Before applying, please review the product terms and conditions for the account you are interested in or speak to our Savings Team for guidance on ISA transfers

If you're considering moving an ISA, see our guide: ISA Transfers Explained.

Is an ISA right for me?

An ISA can be a useful option if you want to save or invest in a tax-efficient way.

The type of ISA that is right for you will depend on your personal circumstances, financial goals and attitude to risk.

Before opening any savings account, it is always worth considering how often you may need access to your money, whether you are looking for certainty or growth, and how long you plan to save.

Looking for an ISA?

At Hanley Economic Building Society, we offer a range of ISA savings accounts designed to help members save for the future in a tax-efficient way.

Explore our ISA products or speak to our Savings Team to find out more.