What is an ISA and how do they work?
Learn about the different types of ISAs, how they work and how to get the most from them
Published:XX Jan 2025
What is an ISA?
ISA stands for Individual Savings Account. There are 4 different types of ISAs; Cash ISA, Stocks and Shares ISA, Innovative Finance ISA and a Lifetime ISA
There are also 2 types of junior ISAs; Junior Cash ISA and a Junior Stocks and Shares ISA.
All allow you to save tax free up to a certain amount, in different ways. At Tesco Bank we only offer Cash ISA and Junior Cash ISA accounts.
How much can I save in an ISA?
There’s no limit to how much money can be held in an ISA account, though there is a limit to how much you can pay in to your ISAs during each tax year. The tax year runs from 6 April to 5 April.
- ‘Adult’ ISAs: the maximum ISA allowance for the current tax year is £20,000. This is the combined amount you can save across all ‘adult’ ISA types you hold (e.g. Cash ISA, Stocks and Shares ISA, Innovative Finance ISA, Lifetime ISA). Of this limit, a maximum of £4,000 can be deposited into a Lifetime ISA within the tax year. Visit gov.uk for more information on Lifetime ISAs including eligibility.
- Junior ISAs: on top of your personal ISA allowance, you can save up to the annual Junior ISA limit on behalf of your child. £9,000 is the combined amount that can be saved across all Junior ISA accounts held in their name.
You can transfer funds saved in previous tax years without counting towards your annual tax-free ISA limit, even if it exceeds £20,000 (or £9,000 for a Junior ISA).
Example:
Within the tax year you could save £9,000 in a Cash ISA, £7,000 in a Stocks and Share ISA and £4,000 in a Lifetime ISA (using your ‘adult’ ISA allowance). Plus £6,000 in a Junior Cash ISA and £3,000 in a Junior Stocks and Shares ISA (using your child’s Junior ISA allowance).
Or you might choose to save £8,000 in a Cash ISA account, £5,000 in another Cash ISA account and £7,000 in an Innovative Finance ISA.
At the same time, you can choose to transfer any amount that you’ve saved in a previous tax year with another provider. Always check with your current ISA provider if there are any fees for doing so, especially if you have a fixed rate account.
What is a Cash ISA?
Cash ISAs are typically offered by banks and building societies. You can usually choose between an instant access or fixed rate account as well as a junior cash ISA.
- An instant access ISA usually allows you to make withdrawals and has a standard variable rate of interest, meaning the rate could go up or down. If the ISA is flexible, like ours, you can take money out and replace it during the same tax year without re-counting towards your ISA limit.
Some providers limit how much you can take out or pay in. You’ll need to consider these limits when moving money between your cash ISA accounts.
- A fixed rate ISA has a fixed interest rate that won't change for the duration of the fixed term. They’re designed to prevent withdrawals. If you wish to, you typically have to withdraw the full balance and close the account, paying an early exit fee (ours is 90 days worth of interest) to do so.
- Junior Cash ISAs allow you to save on behalf of your child without impacting your ISA limit. The money in the account belongs to them and can only be transferred to another Junior ISA in full, not withdrawn. When the child turns 18, they can access the money in their Junior ISA.
Please always check the rules of the account set out by the provider.
How do Cash ISAs work?
- You open and add money to the account – this is called making a deposit, which counts towards your overall ISA limit for the tax year.
- You can transfer funds saved in other ISAs. Funds moved from previous tax years won’t contribute to your ISA limit for the current tax year, as long as you use the ISA Transfer Process. See more on this below.
- If the account is a fixed rate ISA, you may only have a certain period of time to make your deposits. With our fixed ISA you have 30 days. If the account is instant access or a junior account, you’ll be able to continue making deposits when it suits you (up to the ISA limit).
- Interest can be paid annually or monthly - our accounts are paid annually only.
- The interest you earn won’t count towards your personal savings allowance, so you won’t pay tax on the interest you earn. Though it’s important to remember you won’t always have to pay tax on the interest you earn in a regular Savings Account, it depends if the amount of interest you earn exceeds your Personal Savings Allowance.
How do I transfer my ISA to another provider?
- To transfer from one ISA provider to another you usually have to open a new ISA account with your chosen provider and instruct them to transfer your funds from your current provider.
- It's important for the providers to handle the transfer and not to withdraw and move the funds yourself, as doing so would lose it’s tax free benefits and the transferred funds could end up contributing to your ISA limit for the year.
- To transfer your current ISA to or from Tesco Bank, please visit our ISA Transfer guide.
Do I have to pay tax on my savings?
When you save in an ISA the interest you earn won’t contribute to your Personal Savings Allowance, so you won’t pay tax on the interest you earn.
When you earn interest from a savings account that isn’t an ISA, it will count towards your Personal Savings Allowance. This doesn’t mean you’ll pay income tax on the interest you earn (most people can earn some interest from their savings without paying tax, source: HMRC “Tax on Savings Interest” 16/09/2024) but it could if the amount of interest you earn goes beyond your Personal Savings Allowance.
The Personal Savings Allowance depends on what rate of income tax you pay:
- Basic-rate (20%) taxpayers: can earn £1,000 in savings interest per year with no tax.
- Higher-rate (40%) taxpayers: can earn £500 in savings interest per year with no tax.
- Additional-rate (45%) taxpayers: £0 – they do not get an allowance.
- If you're a non-taxpayer: that is you have less than £12,570 income per year, you may be able to earn as much as £18,570 in savings interest tax-free.
Tesco Bank won’t deduct tax from the interest you earn. The tax rules set by HM Revenue & Customs are subject to change, and the value of tax benefits depends on your individual circumstances.
I already have an ISA, can I open another one?
Yes, but there’s a few exceptions.
For ‘adult’ ISAs:
- You can pay into and hold multiple ISAs in each tax year as long as you don’t pay in more than the £20,000 limit between them all in this current tax year.
- You can only pay into one Cash ISA with us per tax year. Some providers may allow you to have and deposit into more than one.
- Remember, the combined maximum amount you can save across all ISA types you hold is £20,000 for the current tax year.
- You can transfer funds between providers without counting towards your ISA limit for the current tax year.
For Junior ISAs:
- You can open and pay into only one Junior cash ISA and one Junior stocks and shares ISA at any time. This is in addition to any other ISA accounts you hold.
- This means if you have a Junior Cash ISA and want to open another, you’d need to transfer your full ISA balance to the new provider.