Transcription
If you live in the UK, you've probably heard people talking about ISAs, especially as we get closer to April. But what exactly are they, and more importantly, why should you care? By the end of this video, you'll know the answer to both of those questions and exactly what steps to take before April the 5th to make sure you don't lose out on your tax-free allowance. Because once it's gone, you can't get it back.
If you're new here, hi, I'm Nisha, a qualified accountant, and on this channel, we discuss all things personal finance and self-development. Let's get into it.
What is an ISA? Imagine you've got some money saved up; maybe you want that money to work for you, to make more money. You could put it in a bank and earn interest, or you could invest it in the stock market. But here's the thing: normally, when you make money from your money, the tax man takes a cut of those earnings. That's where an ISA comes in. It stands for an Individual Savings Account, and it's basically your ticket to tax-free savings and investments.
So, an ISA isn't an investment itself. Think of it more like a protective wrapper or a special box, and anything you put inside this box is shielded from tax—the interest you earn, the investment gains, the compound growth over decades—it's all yours to keep, and the tax man can't touch it. Each year you get an ISA allowance; that's the maximum amount you can put into this tax-free box. And for the 2025-2026 tax year, that allowance is £20,000.
Now, there are five main types of ISAs, each designed for a different purpose. First, you have a Cash ISA. This is basically a savings account where all the interest is tax-free—super simple, essentially zero risk. Then you have a Stocks and Shares ISA. This is where you can invest in the stock market—things like shares, funds, bonds—and all your gains are completely tax-free. Then you have a Lifetime ISA, or LISA. This one's special because the government actually adds a 25% bonus to what you save, but it's specifically for first-time home buyers or for retirement savings, and it has some major drawbacks which we'll come to in a moment. And then you have a Junior ISA. This is for the kids in your life. It has its own separate £9,000 annual limit, which doesn't count towards the £20,000 annual allowance that you have, and it's a great way to build a nest egg for their future. And then you have an Innovative Finance ISA. This is for peer-to-peer lending, but honestly, I want to focus on the first four types today because they're a lot more relevant for most people.
So you can split your £20,000 adult ISA allowance between the different types of adult ISA—so between the Cash ISA, between the Stocks and Shares ISA, between the Lifetime ISA, and the Innovative Finance ISA—but you can't exceed that total £20,000 limit across them. The Junior ISA has its own separate £9,000 annual allowance per child and it does not count towards your personal £20,000 allowance. So that means parents can maximize their own ISA allowance and contribute to their child's Junior ISA in the same tax year.
Now, here's the important part: you must save or invest by the 5th of April, the end of the tax year, for it to count towards this year's allowance. Any unused allowance—it doesn't roll over. So if you don't use it, you completely lose it, and then a new £20,000 balance becomes available on the 6th of April when the new tax year begins.
So now we've got the foundations cleared up; let's break down the different types of ISAs in more detail so you can figure out which one is right for you. Let's start with Cash ISAs.
What is a Cash ISA? If you're saving money in a regular bank account, you might have to pay tax on the interest if it exceeds—if it goes over—something called the Personal Savings Allowance. And here's how that works: if you're a basic-rate taxpayer in the 20% tax bracket, you can earn up to £1,000 in interest per year before paying tax on it. If you're a higher-rate taxpayer in the 40% bracket, that drops to just £500 per year. And if you're an additional-rate taxpayer—so in the 45% bracket—sorry, you get no tax-free savings allowance at all; you'll always pay tax on your savings interest. When interest rates were super low in 2021-2022, a few years ago, hardly anyone needed to worry about this, but now that the rates have gone up, things have changed. A basic-rate taxpayer with about £20,000 in savings could start paying tax on their interest, and higher-rate taxpayers might hit that tax threshold with just £10,000 in savings. So if you're not using a Cash ISA, you could be unnecessarily paying tax on your hard-earned interest. With a Cash ISA, everything you put in is protected from tax. So save—you deposit £20,000 this year, right now, and then another £20,000 next year on the 6th of April, and then another £20,000 the year after—you could have £60,000 sitting in a Cash ISA, and then all the interest that you earn on that amount will always be tax-free.
Just like a regular savings account, Cash ISAs come in different flavors. You have an easy-access Cash ISA where you can withdraw your money whenever you want. Then you have a fixed-rate Cash ISA where you lock your money away for a set period, and usually, that pays a higher interest rate in return. And then you have a notice Cash ISA where you need to give 30 to 90 days' notice before withdrawing.
Now, what is a Stocks and Shares ISA? This is where you can really grow your money over time by investing in things like funds, bonds, or shares in individual companies. So to give you a real example: if you had invested £5,000 into JD Sports in 2009 and then you sold it in 2019, your investment would have grown to over £47,000. If you had invested that amount outside of a Stocks and Shares ISA, you would have been hit with a tax bill, which is just unnecessary. If you've done this through a Stocks and Shares ISA, however, if you invested that money through a Stocks and Shares ISA, that entire amount would have been yours to keep; you wouldn't have had to pay a penny in capital gains tax. Now, I'm not saying you should go and pick individual stocks—that can also be risky if you don't know what you're doing—but even if you just invest in something diversified like the S&P 500 or a global market index fund, you could see returns of around 7 to 8% per year, taking into account inflation and based on historical data. And within a Stocks and Shares ISA, all of those gains remain completely tax-free: no dividends tax, no capital gains tax; it all stays with you. And one of the new rules with ISAs is that if you already have a Stocks and Shares ISA with a certain provider, you can also have another Stocks and Shares ISA with another provider in the same tax year.
I've linked some investment platforms I personally use, and given where we're approaching the new tax year, they're offering different bonuses and perks which you might as well make use of. One of my favorites is Trading 212. I've been using it for years now. I'll put a screen recording on the screen right now to show you how to open up an account—a Stocks and Shares ISA account. You simply download the app, you choose your country of residence, you pick Stocks and Shares ISA, and then you fill in all of your details. If you're a new customer, you can also get a free fractional share worth up to £100 or €100 by using the code Nisha N-I-S-H-A. Put that in here; you just need to deposit £1 within the first 10 days of opening your account to be able to get that.
Next up, we have a Lifetime ISA. What is a Lifetime ISA, or a LISA? This one is specifically designed to help you either save for your first home—as long as that property costs £450,000 or less—or for retirement. The LISA works a bit differently from other ISAs. You can only put in up to £4,000 each tax year, and that makes up part of that £20,000 annual allowance. But this is the good part: the government adds a 25% bonus. So if you save the full £4,000, you'll get £1,000 free from the government—completely free money. There are two types: there's a Cash LISA, and that's better if you're planning to buy a home in the near future; or there's a Stocks and Shares LISA, which is better for long-term retirement savings. I am personally not a fan of the LISA because it has some pretty big drawbacks that you need to consider. You can only withdraw cash if you're buying your first home or you're 60 or over. Withdraw at any other time, and you face a penalty of 25% on the amount that you withdraw—so effectively, that's an overall loss of over 6%. And due to the way house prices are at the moment, many first-time buyers are now struggling to find homes under £450,000, especially in London and in the Southeast. And this cap has been in place for years and it's arguably outdated now. So if they were ever to remove the LISA withdrawal penalty, then sure, it might make sense and become a better option for first-time buyers, but as things stand, my opinion is, if you're looking to buy a home that you know is going to cost more than £450,000, it just seems very restrictive at the moment.
And then finally, what is a Junior ISA? This is basically the kids' version of an ISA. It allows you to save or invest tax-free on behalf of your child. You can save in cash, you can invest, or you can do a bit of both. The Junior ISA, like I said, has its own separate £9,000 allowance, which doesn't count towards your personal £20,000 allowance. So technically, before the 5th of April, you could save £20,000 in your own ISA and put another £9,000 into your child's Junior ISA within the same tax year at the same time. And how a Junior ISA works: firstly, the parents have to open and manage the account; then the child gains control at age 16, but can't actually withdraw the money until they're 18. And just like an ISA—an adult ISA—the Junior ISA can be in cash or it could be in stocks and shares. By contributing to a Junior ISA every year, you can build a really amazing financial safety net for your child, whether that's for university, for a house deposit, for their first investments. And then once they turn 18, that Junior ISA automatically converts into an adult ISA. For Junior ISAs, there's loads of firms you can use; two really popular ones are Hargreaves Lansdown and Fidelity.
And that's it. That's all you need to know about ISAs. It sounds a lot more complicated—or people make it out to be a lot more complicated than it actually is—but those are the steps you need to take. I hope that was useful. Don't forget to subscribe if you haven't already; I upload videos like this on a weekly basis. And if you enjoyed this video, you'll also enjoy this one right here on how I manage my money on payday. See you there.