What is an ISA account?

Importantly, the first thing to note is that an ISA is not just a type of bank account but is a “tax wrapper”. Much like a variety pack of cereal, the variety pack itself would be considered your “ISA Allowance” and the individual boxes would be actual accounts you can open.

ISA stands for Individual Savings Account (which is where a lot of people get confused) and in the tax year 2024/2025 (6 April 2024 - 5 April 2025) you can pay up to £20,000 into various ISAs in your name.

What types of ISA exist?

You can spread your £20,000 allowance (if you are lucky enough to have this much) across the following types of ISA:

Cash ISA (Basically a savings account)

This is the most common ISA in the UK as historically banks have tried to push these to their customers to “protect them from tax” which until recent interest rate hikes hasn’t really been an issue.

Since 2016, interest on bank accounts has become taxable, although only if you earn above £1,000 per tax year (as a basic rate taxpayer) or if you earn above £500 as a higher rate taxpayer.

Therefore, unless you have enough cash in the bank that you’ll be earning above these amount it’s largely redundant and in my opinion a waste of your ISA allowance.

Stocks & Shares ISA (Your money is invested into the stock market)

This is likely the most efficient way to use your ISA allowance as with stocks and shares ISAs you are avoiding potential taxes:

If you have considered investing for a while but aren’t sure where to start, you can check out my free investing guide here and can see some of the top ISAs available below.

Lifetime ISA (For first-time buyers or retirement)

If you are planning to buy your first home for less than £450,000 this is well worth considering. You can use £4,000 of your ISA allowance each year to pay into one of these accounts and the Government will give you a 25% bonus up to £1,000 each tax year.

You can also use these to save for retirement, although the benefits are largely the same as a personal pension.

It’s key to ensure that you will use this for either of the above, otherwise you will face a 25% penalty on withdrawing the funds for anything else, which after taking the bonus into account means you will lose 6.25% of the cash you paid in plus the full bonus.

You must be aged 18-39 in order to open one of these accounts. Here are the full terms from the Government.

Innovative Finance ISA (Your money gets lent to those looking to borrow)

These are the least popular types of ISA as they come with a varying degree of risk which is generally higher than investing in stocks and shares, with a lower amount of return.

I am by no means an expert on these, so here is an explanation from Money.co.uk.

How many ISAs can you have?

This has changed as of 6 April 2024. Previously you could only pay into 1 of each ISA type each tax year. So for example, if you had opened a Cash ISA with NatWest, you couldn’t then open another with Lloyds and pay into it until the next tax year!

Since 6 April 2024, you can open as many ISAs as you wish in the tax year and pay into them so long as you do not invest over the £20,000 overall. It might become tricky to track your contributions if paying into lots so I would recommend keeping tabs.

Best ISA Accounts available?

Cash ISA: 5.16% with Moneybox**

This is the best easy access account on the market at the moment (minimum £500). Can only be opened online. Please note that you may be able to get a better rate from other savings accounts.

Cash Lifetime ISA: 4.40% with Moneybox**

New customers can receive 3.5% variable interest + a 0.90% fixed rate bonus for the first year. You can open an account through their great app and utilise all of their other features. They have a rounding system which automatically rounds your spending and saves it for you.

Stocks & Shares ISA OR Lifetime ISA: Managed Portfolio with Nutmeg*

Using our link, you can receive 6 months-free if you open a stocks & shares ISA or Lifetime ISA with Nutmeg. They allocate you a fully managed portfolio based on your responses to a risk questionnaire. This is invested into ETFs which are a safer option and is re-balanced regularly to respond to market conditions.

Stocks & Shares ISA: DIY Investing with Trading212*

This free-to-use app allows you to buy and sell stocks and ETFs at the click of a button from £1. What’s more sign up with our referral code listed here and receive a free share worth up to £100 when you open an account and deposit £1.

Check out my free investing guide here.

*If you use our link to open an account with any investment platform indicated with an asterisk, I may receive a commission in the process. All commissions are re-invested into growing The Bank Engine and we would like to thank you for your support.

**Please note that I am a shareholder in Digital Moneybox Limited (trading as Moneybox) and therefore may inadvertently receive a gain in the long-term if you open an account with them. I am recommending them here as they are hands-down the best Cash Lifetime ISA I have used and would recommend them regardless.