What is an ISA?

ISAs are never far from the headlines and are often heralded as the best home for your savings, but what is all the fuss about? We explain exactly what an ISA is.

What is an ISA?

An ISA (Individual Savings Account) is a tax free wrapper that you can use to protect your savings or investments from income and capital gains tax.

What are the different types of ISA?

There are two different types of ISA; Cash ISAs and Investment ISAs.

A Cash ISA works like a standard savings account in that you earn interest on any money you pay in. The main difference is that while the interest you earn on money in an ordinary savings account is taxed, any interest you earn on ISA savings is paid tax free.

Equally, any profits from Investment ISAs are exempt from income and capital gains tax.

An Investment ISA is a tax-free wrapper that can encompass a wide range of different types of investments, including Unit Trusts, OEICs, Investment Trusts or stocks and shares. 

For the 2013/2014 tax year you can save up to £5,760 in a Cash ISA and up to £11,520 in an Investment ISA (less any amount you’ve saved in a Cash ISA). This increased from £5,640 and £11,280 respectively in the 2012/13 tax year.

For more information on the difference between Cash ISAs and Investment ISAs read our guides: Cash ISAs: A Beginner's Guide and Investment ISAs: A Beginner’s Guide.

What are the benefits of saving in an ISA?

The main benefit of placing your savings or investments into an ISA is that any interest or profit will be tax free.

This can make a big difference to the return, with basic rate tax payers seeing a 20% benefit, with this climbing to a 40% benefit for higher rate tax payers.

Are there any drawbacks to saving in an ISA?

No, not really - an ISA is simply a way to keep all of the interest or profits you earn from a savings account or investment each year.

The only real drawback is that there is a limit to how much money you can put into an ISA! •

Are ISAs covered by the £85,000 of FSCS protection?

Yes, any money you deposit in an ISA will be covered by FSCS (Financial Services Compensation Scheme) providing it is depositing with an FCA authorised provider.

However, the £85,000 only applies to each FCA licence, with many major banks and building societies operating under a single licence sharing thus sharing the £85,000 limit.

For example, NatWest and The Royal Bank of Scotland share an FCA licence so you could only have £85,000 deposited with them in total protected by FSCS.

You can use our FSCS Compensation Limits Search to check whether your savings are 100% protected by the FSCS guarantee.