What is an ISA?

No matter what your financial goals are, having an effective way of saving is likely to be key to achieving them. When looking at opening a savings account, one of the options you see will be an Individual Savings Account (ISA). 

A wrapper for your savings

An ISA is often described as a 'wrapper' within which you can hold savings and investments without paying tax on any interest or capital gains. 

You don't have to declare ISA interest or capital gains on your tax return, but it’s important to be aware that the way an ISA impacts your tax depends on your individual circumstances and may be subject to change in the future.

The ISA allowance

The government sets a limit on the amount you can save into an ISA every financial year without having to pay tax on any interest earned. The ISA allowance for 2019/2020 is £20,000.

The value of an ISA can also be passed on to your spouse or civil partner tax-efficiently by way of an allowance if you pass away, which isn't the case with an ordinary savings account. For this to take place, the government requires you to be living together at the time of death and not separated by court order, deed of separation or in a circumstance where the marriage or civil partnership has broken down.1

Types of ISAs

There are several types of ISAs:

  • Cash ISAs work like other savings account, except they can be tax efficient. You can choose from fixed rate cash ISAs, which offer you a fixed interest rate over a set period of time, or variable rate cash ISAs, which have a variable interest rate over a set period. Interest rates vary depending on the bank or building society you choose.
  • Stocks and shares ISAs enable you to make investments without having to pay income tax or capital gains tax on any profits made. Stocks and shares ISAs have the potential to earn a greater rate of interest, but it’s important to remember the value of investments can fall as well as rise and you may not get back what you invested. They should also be considered a medium to long-term commitment, meaning you should be prepared to hold them for at least 5 years.
  • Help to Buy ISAs are designed to help you afford your first home. To qualify, you must be a first time buyer and intend to live there. It also must be worth under £250,000, or under £450,000 if it's in London. As well as being tax efficient, this type of ISA offers a government bonus contribution of 25% up to a maximum of £3,000 on your savings. With HSBC, you can start your Help to buy ISA with £1,000 then save up to £2,400 per year into it.
  • Lifetime ISAs are designed to help you save for your first home or for later life and you can hold both cash and investments within them. They're available for people aged under 40 and you can save up to £4,000 a year, up until the age of 50. The government will top up your savings, adding 25% up to a maximum of £1,000 each year. You'll pay a 25% charge to withdraw from this type of ISA unless you use it to buy your first home or you're aged 60 or over. HSBC does not offer Lifetime ISAs.

What next?

You can save into one type of ISA, or in some cases spread your ISA allowance across several types. Regardless of what type of savings account you choose, there are some tips you can follow to boost your savings balance.

Explore more: How to save money