Tax-free savings guide

The information in this guide was last updated on 06/04/2016

Did you know that if you exceed the Personal Savings Allowance, you may have to pay tax on the interest you earn, on some of your savings?

You can protect your savings from tax by putting them in an Individual Savings Account. We explain how they work.

What's an ISA?

An Individual Savings Account (ISA) is a tax-efficient way to save or invest which means your money is protected from being taxed.

You pay no income tax or capital gains tax on earnings from:

  • interest
  • bonus payments
  • investment profits.

There are 4 types of ISA:

  • Cash ISAs - are tax-free savings accounts. You pay no tax on the interest you earn
  • Junior ISAs - designed for children. Interest is tax-efficient and the money is not available until the child is 18
  • Stocks & Shares ISAs - are tax-efficient for investments like funds or company shares, which means that they have a 'favourable tax status'. If you're interested in learning more about them, we've written a Guide to Stocks & Shares ISAs
  • Innovative Finance ISAs - from 6 April 2016 HMRC is introducing a new ISA where interest and gains from qualifying peer to peer loans will be eligible for ISA tax advantages. Nationwide does not at present offer Innovative Finance ISAs.

Important information

The favourable tax treatment for ISAs depends on your individual circumstances and may vary in the future*.

You need to be aged 16 or over and be resident in the UK to hold a cash ISA. You can only subscribe to one provider's cash ISA in a tax year (which runs from 6 April in one year to 5 April the next year).

See our guide for eligibility requirements for Stocks & Shares ISAs.

The ISA allowance explained

Each tax year you can pay a certain amount into an ISA. A tax year runs from 6 April to 5 April the following year.

You can pay into any of the ISA(s) you hold in each tax year, as long as you don't go over your allowance.

For the 2016/17 tax year, the total ISA allowance is £15,240.

You can choose to split this allowance between a cash ISA, Stocks & Shares ISA and an Innovative Finance ISA.

For Junior ISAs, there is a separate allowance which, for the 2016/17 tax year, is £4,080.

Your ISA allowance is how much you can add to ISAs during the tax year. It's not a limit on your total balance. This means that:

  • Over a number of years you can build up your savings to much more than the annual allowance
  • The introduction of ISA flexibility on 6 April 2016 means that if you withdraw money from your cash ISA, you can now replace it (subject to the terms and conditions of your account) within the same tax year, without it counting towards your annual ISA allowance. Replacement money has to be paid into your cash ISA in the same tax year as it is withdrawn, otherwise your annual ISA allowance will be impacted.

Transferring ISAs

It's important to know that if you withdraw money from an ISA, you'll lose the tax benefits on that money.

But, you don't need to keep the money in your ISA with the same provider. You can transfer ISAs to new providers. The rules say that you can transfer some or all of the contents in ISAs from previous tax years but only the total amount you've got in this year's ISA.

Transfers made from one ISA provider to another ISA provider in a tax year will not impact on your annual ISA allowance for that tax year.

For example you could:

  • Open one cash ISA to put your 2016/17 allowance into, and open another to move old ISA allowances into
  • Or you could open one cash ISA and put your new allowance into it, and transfer old allowances into it too.

Remember to check to make sure that the ISA you open accepts transfers.

What do I need to know about cash ISAs?

A cash ISA works like a normal savings account. There's a wide range of accounts available, including fixed rate, and instant access options.

You don't need a large lump sum to get started. You can open some ISAs with as little as £1. Some cash ISAs let you put in money whenever you like, and some are designed to help you save by needing a regular monthly deposit.

Lots of cash ISAs let you take your money out whenever you need it, and with ISA Flexibility you'll be able to replace this, in the same tax year, without impacting your ISA subscription allowance.

As with savings accounts, if you can sacrifice some flexibility or put your money away for longer, you could get a better rate.

You can open more than one cash ISA product with us in the same tax year. It means that you get a range of benefits, for instance if you wanted put some of your money in a Fixed Rate ISA for a better rate, and keep some in an easy to access account.

What do I need to know about Junior ISAs?

You can open and manage a Junior ISA for someone under 18. The contents of the ISA belong to them, not to you, and they'll get full access to it when they're 18.

Children aged 16 or 17 can open their own Junior ISA. Remember, some cash ISAs are also open to 16 and 17 year olds so it's worth doing some research to make sure you've got the right ISA for you.

You can get Junior cash ISAs and Junior Stocks & Shares ISAs. You can split your allowance between both. You can transfer between these ISAs held with the same or different providers.

From 6 April 2015 you can also transfer a Child Trust Fund account to a Junior cash ISA.

* The government is responsible for the tax treatment of these products. For full details read the HMRC guidance.