3 practical benefits of saving into an ISA as they turn 25

Back in 1999, you might have been gearing up for a momentous New Year’s Eve party to welcome in the new millennium, or perhaps wondering if the rumours about the millennium bug would prove to be true.

Something else that you might have been doing is opening your first ISA. This year marks the 25th anniversary of the launch of the tax-efficient savings and investment wrapper.

In that time, the government has introduced several different types of ISAs, each offering different benefits. Read on to learn more about how ISAs could help you grow your wealth as you work towards your long-term goals.

There are several different types of ISAs available in 2024/25

In 2024/25, your ISA allowance is £20,000. This is the total amount you can save or invest each tax year into the ISAs you have opened, although some types of ISAs have a lower limit so you can only deposit a portion of this allowance into them each year.

Below are details of the five main types of ISAs that are available today.

Cash ISA

A Cash ISA is similar to a normal savings account, except that the interest your money earns is free from Income Tax, even if it exceeds your Personal Savings Allowance (PSA). Unlike a Stocks and Shares ISA, your money is not invested – read more below.

Stocks and Shares ISA

A Stocks and Shares ISA allows you to put your money into a range of different types of investments, such as shares, funds, bonds, and investment trusts.

Unlike investments that are made in an investment account, any returns your money generates in a Stocks and Shares ISA are free from Income Tax, Capital Gains Tax (CGT) and Dividend Tax.

Lifetime ISA

A Lifetime ISA (LISA) is designed specifically for those between the ages of 18 and 40 to help you save money to buy your first home (subject to certain criteria) or to save towards retirement. You can save through a Cash LISA or invest through a Stocks and Shares LISA.

You can contribute a maximum of £4,000 a year, which will count towards your ISA allowance for that tax year. Each year, the government will add a 25% bonus to the contributions you’ve made, up to a maximum of £1,000 each year. However, if you withdraw from the ISA before age 60 for any other reason than buying a first home, you’ll face a 25% penalty.

You can only open a LISA between the ages of 18 and 40, and contribute to it up to the age of 50. After this, you will continue to generate interest or investment returns, but you cannot make more contributions.

If you plan to use a LISA to buy your first home, you must:

  • Buy a house that costs no more than £450,000
  • Buy the property at least 12 months after you make your first payment into the LISA
  • Use a conveyancer or solicitor to act for you in the purchase – the ISA provider will pay the funds directly to them
  • Buy with a mortgage.

Junior ISA

A Junior ISA (JISA) is a type of ISA that you can open on behalf of a child who is under 18 years of age, provided they live in the UK. In 2024/25, the annual JISA allowance is £9,000.

You can open a Cash JISA, a Stocks and Shares JISA, or one of each. Your child will be permitted to take over managing the account from the age of 16, but cannot withdraw any money until they turn 18. At this point, the account becomes an adult ISA.

Innovative Finance ISA

An Innovative Finance ISA enables you to put your money into peer-to-peer lending, rather than holding your savings as cash or investments.

Peer-to-peer lending is a way to invest in smaller businesses that are not on the stock market, individuals, or property developers. It’s a lot riskier than investing in the stock market, and the investments you make are not protected by the Financial Services Compensation Scheme (FSCS), so you could lose your money.

We strongly recommend taking advice from your financial planner before deciding to pursue peer-to-peer lending.

3 practical benefits of saving or investing with an ISA

Despite some early criticism when they were first launched, ISAs are now very popular because of the range of benefits they offer to savers, such as the following three:

1. Earn interest and investment returns tax-efficiently

The biggest benefit of an ISA is the ability to grow your savings free of Income Tax, CGT, or Dividend Tax.

In 2024/25, you can contribute up to £20,000 to your ISAs. This is especially useful as the government has reduced the threshold above which CGT and Dividend Tax are payable from 6 April 2024.

2. Various options offer flexibility for your circumstances

The different types of ISAs that you can open mean that there is flexibility available to suit your needs and goals. For example, a “flexible” Cash ISA means that you can withdraw from your ISA if needed, and if you put those funds back in again in the same tax year, it doesn’t count towards your ISA allowance.

Your financial planner can help you identify the most suitable wrapper to use based on your circumstances.

3. Specific features can help you to achieve your goals

Another benefit of saving or investing with an ISA is the opportunity to save towards a range of goals because of the features that different types of ISAs offer.

For example, a LISA could support you with long-term goals such as saving towards buying your first home or your retirement. Meanwhile, a JISA can enable you to help your children start saving and investing for their future. This could help them to develop good savings habits from a young age as they put money towards future goals such as university fees or buying their first home.

The chancellor has announced the development of a new UK ISA

In his Spring Budget in March 2024, the chancellor announced that a new UK ISA is currently under consultation.

The UK ISA is designed to encourage more investment in British companies, and the government expects to introduce an additional £5,000 allowance specifically for this ISA. That would increase the total amount you can save into an ISA from £20,000 to £25,000, provided that £5,000 of that is saved into a UK ISA.

Get in touch

At Logic, we can help you and your loved ones to manage your finances.

If you have any questions about how best to save towards your goals, speak to us now. Please email us at info@logicfinancialservices.co.uk or check with your adviser.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.