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Are you exploring different ways you could be investing to build your wealth for the future? Among the many different types of investment accounts available today, Individual Savings Accounts (ISAs) are one of the most common tax-efficient ways to grow your savings in the UK.
But many investors might not know exactly how these investment vehicles work. So, if you want to know more about these accounts to help your investments, you might want to open a stocks and shares ISA, for example, then read on.
What are ISAs?
Introduced in the new April tax year in 1999, ISAs allow you to grow your savings in an account where you also earn interest and potentially dividends and capital gains without paying tax on the returns. This makes them a valuable tool for building wealth over time.
Each year, you can contribute up to £20,000 (as of the current 2025/26 tax year) into your ISA accounts, and the money will be sheltered from income and capital gains tax (CGT).
Types of ISAs
There are four different types of ISAs that you can invest in, each catering to different financial goals:
- Cash ISA: A savings account where you can earn tax-free interest.
- Stocks and shares ISA: Allows you to invest in a range of assets – such as stocks, bonds, and funds – with all your returns sheltered from CGT.
- Innovative finance ISA: Involves peer-to-peer lending, offering you potentially higher returns but with higher levels of risk.
- Lifetime ISA (LISA): Designed for first-time homebuyers or investors saving for retirement, where you can receive a government bonus of 25% on contributions up to £4,000 each year.
The £20,000 ISA allowance applies to all four types of accounts, so you must spread this total across your accounts however you see fit. This allowance resets every new tax year and cannot be carried over.
Benefits of ISAs
There are many reasons why ISAs are such a popular form of investing today:
- Tax efficiency: You won’t pay any income tax on the interest or dividends in your accounts, nor CGT on investments. This allows you to grow your savings more efficiently whilst sheltering them from the impact of tax charges.
- Flexibility: Funds can be withdrawn from your ISAs at any time without penalty, although some ISAs – like the LISA – may have specific terms.
- Accessibility: A variety of ISAs are available to suit different saving and investing preferences. You can even open up a Junior ISA (JISA) to build wealth for your children.
Opening and Managing an ISA
To open an ISA, you must be a UK resident aged 18 or over (16 for Cash ISAs). You can open an ISA through your chosen investment platform or modern wealth management firm.
Managing your ISA involves several things, such as monitoring contributions to stay within annual limits, reviewing investment performance, and making adjustments as needed.
Many providers offer online tools and mobile apps to help you track your ISA’s performance more carefully and manage your portfolio with ease.
ISAs offer a highly flexible and tax-efficient way to save and invest towards your future goals. By understanding the different types of ISAs and how to manage them effectively, you can make the most of your annual allowance each year and work towards your objectives with clarity.
Please note, the value of your investments can go down as well as up.