The ISA wrapper
An Individual Savings Account (ISA) is a tax-efficient wrapper for savings and investments. Money held inside an ISA grows free of income tax and capital gains tax. Every UK adult can contribute up to £20,000 per tax year across all ISA types combined.
Cash ISA
A cash ISA works like a savings account with a tax-free wrapper. Interest earned is tax-free. This matters if you are a higher-rate taxpayer or have already used your Personal Savings Allowance. Cash ISAs are appropriate for money you will need within five years — where you cannot afford to risk the capital.
Stocks and Shares ISA
A Stocks and Shares ISA holds investments — shares, bonds, funds — within a tax-free wrapper. Because investments can fall in value, this is not suitable for money you might need in the short term. Over periods of ten years or more, the historical probability of a diversified portfolio outperforming cash is very high, and the absence of capital gains tax makes the Stocks and Shares ISA compelling for long-term wealth building.
Lifetime ISA
Available to those aged 18-39, the LISA offers a 25% government bonus on contributions up to £4,000 per year. It can be used to buy a first home (on properties up to £450,000) or to supplement retirement income from age 60. Withdrawing for any other purpose incurs a penalty that effectively claws back the government bonus and more.