Individual Savings Accounts (ISA) explained

Key points

• ISAs are designed by the government to encourage saving and investing, making all returns within an ISA tax-free
• ISA allowances are cumulative, so consistent contributions over several years could significantly grow your savings or investments
• You can transfer all or part of your ISA funds to another provider and combine ISAs from previous years, subject to provider rules

There are several kinds of ISAs, including Cash ISAs, Stocks and Shares ISAs, Lifetime ISAs, Innovative Finance ISAs, and Junior ISAs, each designed for different savings or investment needs

Let’s cut through the jargon: ISA stands for Individual Savings Account (Opens in new tab). It’s a simple way, designed by the government, to save or invest your money without paying tax on the interest or returns you earn. That means more of your money stays in your pocket.

There are different types of ISAs to suit all sorts of goals and lifestyles. Here’s a quick rundown:

• Cash ISA: Like a regular savings account, but with tax-free interest.
• Stocks and Shares ISA (Opens in new tab): Invest in the stock market, and you won’t pay tax on any returns
• Lifetime ISA (Opens in new tab) (LISA): Save or invest for your first home or retirement, with a government bonus.
• Innovative Finance ISA: Invest in peer-to-peer lending.
• Junior ISA (Opens in new tab) (JISA): For under-18s, helping parents and guardians save or invest for their children’s future.

If you’re curious about how ISAs work or wondering what the ISA allowances actually mean, you’re in the right place!

What are ISA allowances?

Every ISA comes with a limit, known as the ISA allowance. This is the maximum amount you can pay into your ISAs each tax year, and it’s set by law. The allowance varies and depends on the type of ISA you use:

• The annual ISA allowance is £20,000 in total, which you can split across different types of ISAs
• Lifetime ISAs have a lower limit, currently £4,000 per year, which is part of the £20,000 annual allowance
• Junior ISAs allow up to £9,000 per year per child, which is separate to your own £20,000 allowance

You can split your allowance across different types of ISAs, but you can’t exceed the total limit. Tax rules vary depending on your individual status and may change, but the government updates these figures from time to time, so it’s worth checking the latest numbers (Opens in new tab).

Why consider having an ISA?

This type of account could be worth considering because the contribution amounts are cumulative. So, if you use your full ISA allowance each year for three years, that’s around £60,000 saved or invested – and any growth or interest you earn stays in your ISA and can keep growing. Even if you can't afford to use your full ISA allowance but can put aside a much smaller amount, even just £1,000 a year, these amounts add up over time. Only put in what you won't miss – if that £1,000 is the difference between paying for any of your living expenses or not, pay the bills first.

Investment strategies

Choosing the right ISA is all about your goals and values. You might want to mix and match different types, or focus on one that suits your needs best.

Depending on your provider, you can tailor your investments to your personal values and priorities. For example, at J.P. Morgan Personal Investing – part of the JPMorganChase family – you can choose an investment style that guides how their experts manage your money:

• Fully managed portfolios (Opens in new tab), where you can let the experts handle things for you
• Thematic investing (Opens in new tab), where the focus is on long-term trends like technology, healthcare or resource transformation (this strategy has specific risks and isn’t for everyone).
• Socially responsible investing (Opens in new tab), which prioritises companies that lean towards higher environmental, social and governance standards

Compare investment strategies (Opens in new tab) so you can find the approach that fits your goals and tailor a strategy with investments that match your preferences.

Remember, the right ISA (and investment strategy) depends on what you’re after and what goals you want to achieve long-term. The right provider should help you find a combination that works best for you.

Types of ISAs

Since 6 April 2024, you’ve got more flexibility than ever. You can pay into multiple ISAs of the same type in a single tax year, depending on the type, as long as you don’t go over the maximum annual contribution allowances. Your £20,000 can be split between cash and Stocks and Shares ISAs (including £4,000 for your LISA, if you want).You can also transfer all or just some of your money from one ISA to another provider, subject to their rules, and even combine ISAs from previous years.

Here’s a rundown of the main types:

1. Cash ISA (annual limit: £20,000)

A Cash ISA is a tax-efficient savings account. You’ll need to be 18 or older to open a cash ISA (previously, the age was 16+).

Your £20,000 allowance renews at the start of each tax year on 6 April. If you don't use all of it you can't carry it over to the following year.

Heads up: The Cash ISA allowance is set to change in 2027 – the allowance for individuals under 65 will be cut from £20,000 to £12,000. The total overall ISA limit remains at £20,000, meaning the remaining £8,000 must be used in other ISA types, such as Stocks and Shares. Those aged 65 or older will keep the full £20,000 limit. J.P. Morgan Personal Investing doesn’t offer Cash ISAs, but your respective provider should explain how this change will impact you.

2. Stocks and Shares ISA (annual limit: £20,000)

This one's a little more complex than the Cash ISA because your money is invested. Unlike Cash ISAs, investing comes with risk – but can lead to higher returns in the long-term, especially thanks to compounding. This is the process where you can earn returns on not only your original investment, but also on any previous gains you may have made. You can transfer money from a Cash ISA into a Stocks and Shares ISA, but check with your provider for any restrictions they may have on transferring ISAs, or any charges they may apply. You should also check with your existing provider to see when you’ll stop receiving interest.

You can choose to invest in a variety of shares, bonds and funds within a Stocks and Shares ISA, or a portfolio manager can invest your money for you. The total amount you can pay in each tax year is subject to the same overall £20,000 ISA allowance as a Cash ISA. Any growth or returns you earn from your investments are tax-free. Just remember, you’ll usually pay some fees for managing or buying investments with this type of ISA.

3. Lifetime ISA (annual limit: £4,000)

A Lifetime ISA (LISA) can be a great option if you’re saving or investing for your first home or for retirement. If you’re using it to buy your first home, the property must cost £450,000 or less, and you’ll need to be buying with a mortgage at least 12 months after your first LISA payment. Additionally, this £4,000 is part of your annual £20,000 allowance. You have to be between 18 and 39 years of age when you open one and, while you can open multiple LISAs over time (for example, cash and Stocks and Shares versions), you can only pay into one LISA in each tax year. The government will give you a bonus of 25% on any deposits made in that tax year (up to a maximum of £1,000 per year) until you're 50. You can take the amount you've built up as a tax-free lump sum when you reach 60 if you don't end up using it towards a home. If you withdraw before you're 60 and don't use it to buy a house, you'll pay a 25% penalty on the full amount you are withdrawing, so you could get back less than your original deposit.

If you choose to opt out of your workplace pension to pay into a Lifetime ISA, you may lose the benefits of the employer-matched contributions. Your current and future entitlement to means-tested benefits may also be affected.

4. Innovative Finance ISA (annual limit: £20,000)

If you’re open to exploring new ways to invest and are comfortable with taking on risk, an Innovative Finance ISA (IFISA) uses your money to lend to borrowers or businesses (known as 'peer-to-peer' lending). The borrower then pays back the money you've invested at a rate that's generally higher than you'd get with your regular bank. The downside is the risk of the borrower's inability to pay back their loan, meaning you may not get back what you put in. There's also no protection from the Financial Services Compensation Scheme (Opens in new tab) if you do lose money.

Please note that this is a high-risk investment. People should not invest in them unless they are prepared to lose money.

5. Junior ISA (annual limit: £9,000)

A Junior ISA (JISA) can be a great way to save for children aged under 18 (when they turn 18, the JISA can be converted to an adult ISA, or the cash can be withdrawn by the child). With J.P. Morgan Personal Investing, parents and guardians can only open a JISA for a child under the age of 16.

There are cash JISAs or Stocks and Shares options, and they can be opened either by parents or guardians with parental responsibilities. However, anyone can pay into the JISA once it’s set up. Cash JISAs also tend to come with higher interest rates than adult ISAs, but some restrictions apply (for example, you can only have one at any given time with any provider, although you can have one Stocks and Shares JISA (Opens in new tab) as well).

Importantly, any contributions you make to someone’s JISA won’t affect your own personal ISA allowance.

Please remember that funds can only be withdrawn by the child, and only after they turn 18.

Lapsing ISAs

Rules introduced for the 2024/25 tax year mean savers and investors no longer have to worry about their ISAs lapsing. Previously, if you didn't pay in any money during the previous tax year then you had to reapply for your ISA. However, ISAs will no longer lapse, regardless of whether there is a break in subscriptions or not.

Four ways to help make the most of your ISA

1. If you have a Cash ISA, consider saving into it at the start of the tax year – that way, your cash will benefit from the time and tax advantages straight away (which also applies to Stocks and Shares ISAs).
2. You might want to consider a Stocks and Shares ISA. These can give you the chance to earn higher returns over the long term, but remember they’re riskier, and you could get back less than you initially invested.
3. Whichever option you go for – if you can afford to – try to use your full allowance every year, and not make any withdrawals.
4. Think about whether putting your annual allowance into different types of ISAs could be beneficial to you.

Putting your spare cash in an ISA and making the most of the tax breaks can help you plan for the future, whether it’s for your children’s education or your retirement nest egg.

Making your ISA work for you

ISAs offer a flexible and tax-efficient way to grow your savings or investments, whether you’re planning for your first home, your retirement or your child’s future. With a range of options and strategies to suit different needs, it’s worth taking the time to explore what’s available and make the most of your annual allowance. Remember, even small contributions can add up over time. Choosing the right ISA – and reading our articles or speaking to the J.P. Morgan Personal Investing team – can help you make more informed decisions to reach your financial goals. If you’re unsure where to start, consider speaking to a financial adviser or using comparison tools to find the best fit for you.

Ready to invest?

You can now open an account with J.P. Morgan Personal Investing and keep an eye on your investments through the Chase app – so you can see everything in one place.

As with all investing, your capital is at risk. The value of your portfolio can go down or up and you may get back less than you invest. Tax rules vary by individual status and may change. Before transferring, check you won't lose any benefits or pay any unexpected charges. 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 Chase or JPMorgan Chase Bank, N.A. J.P. Morgan Personal Investing is a trading name of J.P. Morgan Personal Investing Limited, authorised and regulated by the Financial Conduct Authority in relation to certain investment services and restricted advice only. Financial Services Register: 552016. Registered in England & Wales with company number 07503666. Registered office: 25 Bank St, Canary Wharf, London E14 5JP.

The Hub is intended as a knowledge portal to provide information on a range of topics, including financial products and lifestyle management. Articles may reference products and services which Chase UK does not currently offer. J.P. Morgan Personal Investing and Chase do not offer cash ISAs. For full details on the products and services and do offer, please refer to their websites.This article is for general information only and does not constitute financial or tax advice.