What is an ISA?

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

The government sets the 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.

This means you don't have to declare ISA interest or capital gains tax 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 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. This 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
  • to not separated by court order, deed of separation
  • to not be in a circumstance where the marriage or civil partnership has broken down.1

Types of ISAs

Cash ISAs

These work like other savings accounts, 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 (not offered by HSBC)
  • 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

These enable you to make investments without having to pay income tax or capital gains tax on any profits made. Given they enable you to invest, stocks and shares ISAs have the potential to earn a greater rate of interest than other savings.

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.

Lifetime ISAs

These are designed to help you save for your first home or for later life. 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 doesn't offer Lifetime ISAs.

Innovative finance ISA

This is an ISA that contains peer-to-peer loans instead of cash or stocks and shares. HSBC doesn't offer innovative finances 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