ISAs explained

What is an ISA?

An ISA is a tax-free savings or investment account that lets you save or invest your money without paying tax on your interest or profits gains - unlike a normal savings account you might hold with your bank. There are four main types of ISAs:

• Cash ISA
• Stocks and shares ISA
• Lifetime ISA (choose between a Cash Lifetime ISA or a Stocks and Shares Lifetime ISA)
• Innovative Finance ISA

How do ISAs work? 

ISAs work by protecting your savings and investments in a ‘tax wrapper’.Anything held within your ISA wrapper will be protected from HMRC, meaning your ISA savings are protected from being taxed. Anything you save outside of an ISA, like in a regular savings account, could be taxed. You can save or invest up to £20,000 each tax year into an ISA - this allowance is spread across all ISA accounts you hold, including Lifetime ISAs.

Lifetime ISAs work differently from regular ISAs. If you’re saving for your first home or retirement and you’re aged 18-39 they can be much more rewarding. You can save up to £4,000 a year in a Lifetime ISA and you’ll get a free 25% bonus from the government, up to £1,000 per year. If you use a Cash Lifetime ISA, you’ll also earn interest - or potential investment growth if you use a Stocks & Shares Lifetime ISA. You can then use your LISA savings to buy your first home worth up to £450,000 or fund your retirement from age 60. 

Keep in mind that if you make a LISA withdrawal for something other than an eligible property purchase or funding retirement once you reach 60, you’ll pay a 25% withdrawal penalty. This will deduct the government bonus and £6.25 out of every £100 of your own money, meaning you will get less than you put in. 

Learn more: Is an ISA better than a pension?

Can I have two ISAs? 

Yes, you can have two or more ISAs. There’s nothing stopping you from opening or paying into more than one Cash ISA, Stocks and Shares ISA or Innovative Finance ISA, so if you already have one and you’ve spotted a better service or higher interest rate, you could open a second account or transfer your existing ISA to the new provider. Just be aware that some providers will only let you open one of each ISA type with them, and you can only save up to £20,000 across all your ISA accounts each tax year - even if they are held with different providers.

The exception to this is a Lifetime ISA. You can only pay into one Lifetime ISA each tax year,  and you can only use one Lifetime ISA per person when you buy your first home. 

Can I put in £20,000 every year in an ISA? 

Yes, you can put £20,000 in an ISA each tax year or spread your annual allowance across multiple ISA types. You could decide to put £10,000 in a Cash ISA, £5,000 in a Stocks and Shares ISA, £4,000 in a Cash Lifetime ISA and £1,000 in an Innovative Finance ISA, for example. It’s up to you how you divide the money, as long as you save no more than £4,000 in your Lifetime ISA and no more than £20,000 across all your accounts each tax year.

Learn more: Is now a good time to save for a house?

Should I max out my ISA every year?

Maxing out your ISA every year is one of the most tax-efficient ways of saving or investing for the future. So if you’re able to save £20,000 a year, making the most of your full ISA allowance can be a smart thing to do. 

If you’re not able to save this much money, you’re certainly not alone. If we divide £20,000 by the number of weeks in a year, this comes to £384, but the average weekly earnings sat at £660 in November 2024. After paying rent, bills, and other essential living expenses, most people would struggle to save enough to max out their ISA allowance!

If you’re a first-time buyer and you’d like to get on the property ladder, you could aim to max out a Lifetime ISA each tax year instead. This can still be a challenge, as you’d need to save the equivalent of £77 a week or £333 a month to reach the £4,000 LISA limit. But the good news is that LISAs give you the flexibility to make regular payments or occasional lump sums if and when you can afford to. With a Tembo Lifetime ISA, your loved ones can also contribute directly into your Lifetime ISA using your very own Gift Link. 

You’ll need to have your LISA open for a full year before you can use the money towards your own home, so open a Tembo Lifetime ISA today with as little as £1 to start the clock! 

Learn more: What salary do I need to buy a house?