How many Isas can I have – and what happens if I break the rules?

Tax-free saving and investing is a no-brainer, as it means your savings can grow faster. An Isa, as a tax-free wrapper around your savings and investments, is an obvious choice.

But exactly which of the five types of Isa to back is less clear. Your age will determine which you’re eligible for, as well as your savings goals. 

Luckily you can choose just one, or opt for a selection. The Isa limit for the current tax year – which limits the total amount you can pay into them each year – is £20,000. If you don’t use the allowance in any tax year, it’s lost.

What are the different types of Isas?

Cash Isa

A cash Isa works in much the same way as a standard savings account, although you won’t pay tax on any interest gained.

This is useful because if you are a basic-rate taxpayer and you save money in an ordinary (non-Isa) savings account, you must pay tax on interest of more than £1,000 in a year, or £500 if you are a higher-rate taxpayer. 

If you are an additional-rate taxpayer you get no tax-free savings allowance at all.

With interest rates at their highest levels for more than a decade – thanks to the Bank of England hiking the base rate – many people will start paying tax on their non-Isa savings.

You can choose an easy-access Isa to freely withdraw your money or, for a slightly higher interest rate, a fixed-rate product, which requires you to leave your money untouched for a fixed period. 

Under current rules, you need to be 16 or over to open a cash Isa.

Lifetime Isa

This Isa was designed for those building either a deposit for their first home or a fund to provide income in retirement. 

You can pay in up to £4,000 a year – which forms part of the £20,000 yearly allowance – and bank up to £1,000 thanks to government top-ups. The money can be used to buy a first property worth up to £450,000. 

Alternatively you can use it to help fund your retirement from the age of 60. If you take the money for any other reason there’s a 25pc exit penalty. 

You must be between 18 and 39 to open a Lifetime Isa which can be opened as a cash or stocks and shares account. Again, there’s no tax to pay on interest payments or dividends.

Stocks and shares ISA

A stocks and shares Isa enables you to buy shares in individual companies, pooled funds, investment trusts, bonds and even commodities such as gold. 

These investments are then placed inside the tax-free Isa wrapper, meaning you won’t pay capital gains tax and dividends are tax-free, too. 

This is even more valuable now the tax-free annual allowance has been reduced to just £1,000 this year, falling to £500 in April 2024, and after taxes on shareholder returns have risen. 

Experts recommend investing for the longer term – at least five years – and being mindful of the element of risk inherent in trading on the stock market. The trade-off is that over the long-term, your money should grow faster than in a cash Isa. 

Historically, stock market returns outweigh gains from interest. 

The Barclays Equity-Gilt study, which looks at the performance of UK equities against UK government bonds and cash from 1899-2022, finds that over any two-year period the probability of equities outperforming cash is 69 pc. Over a ten-year period, this rises to 91 pc.

You need to be at least 18 to open a stocks and shares Isa.

Innovative Finance Isa

An innovative finance Isa lets holders take part in peer-to-peer lending, where investors lend money to individuals or businesses in return for interest. 

Any contribution to this type of Isa – first launched in 2016 – goes towards the £20,000 allowance, while gains are tax-free. 

While these Isas can offer attractive returns, these are not guaranteed and they come with much bigger risks. To ensure consumers understand the level of risk and to protect less experienced investors, the FCA imposed stricter rules in 2019 for peer-to-peer platforms. 

However, these Isas are still not covered by the Financial Services Compensation Scheme, so your money is not protected if anything goes wrong. 

Innovative finance Isas haven’t proved very popular: according to the latest figures available, they made up just 16,000 of the 12m adult Isas opened in the 2020-21 tax year. 

Junior Isa

A Junior Isa can be opened for under-18s any time after their birth. It has a unique annual allowance of £9,000. 

Parents can choose from a cash or investment Junior Isa, with interest and earnings free from tax. 

Once a Junior Isa has been set up by a parent or legal guardian, any family member, godparent or friend can contribute to it. 

The money is then under lock and key until the child reaches 18, though children can start managing their own account once they reach 16. Those aged 16 or 17 can have a Junior Isa allowance plus a separate cash Isa allowance.

How many Isas can I have? 

You can have as many Isas as you like, as long as you meet the eligibility criteria for each type. 

However, the rules dictate that you can only pay into one of each type of Isa in a single tax year. That means you can have just one cash, one Lifetime, one stocks and shares and one innovative finance Isa, for example. 

Crucially you can’t pay in more than the annual Isa allowance each year.

How many Isas can I pay into each year? 

You can’t pay into two of the same type of Isa – you’ll need to stick to one of each kind.

Can I transfer from one Isa to another?

You can transfer your Isa from one provider to another at any time, either to the same type of Isa or to a different type – as long as you’re eligible for the new account.

If you want to transfer money you’ve invested in an Isa during the current year, you must transfer all of it. For money you invested in previous years, you have the choice to transfer all or part of your balance.

Cash Isas are flexible in that if you spot a better rate elsewhere you can move your money, just like with a regular savings account – a useful feature at a time when interest rates are rising. Not all Isa providers will accept transfers, however, so you might not be able to access the new rate.

If you transfer cash and assets from a Lifetime Isa into a different Isa before the age of 60, you’ll have to pay a withdrawal fee of 25 pc.

If you’re moving a stocks and shares Isa from one Isa platform to another there’s a chance there will be an exit fee. 

According to Lang Cat, there are no mainstream platforms still charging an exit fee but some smaller providers may still do so. 

To entice new customers, platforms sometimes offer one-off cashback payments, a refund of exit fees, half-price fees or rewards for recommending friends. 

Steve Nelson, insight director at the consultancy, says: “When looking at platform cost comparisons, there are a few factors to consider. Your portfolio size, investment type, how often you think you’ll trade and future contributions – as well as cost. 

“These combined make up your unique circumstances. Potential cashback payments or rewards are great on the face of it but it’s really important to weigh them up against all those other factors.”

What happens if I break the Isa rules?

HMRC will usually write to you if it notices you’ve broken the Isa rules – and, seeing as Isa providers have to report to the tax authority, it will always know.

Mistakes happen, and if you make the honest mistake of paying more than your annual Isa allowance, or paying into more than one of the same kind of Isa, the money you’ve deposited either over the allowance or in the additional account will usually lose its tax-free status and will be handed back. 

In the case of stocks and shares Isas, this means investments may need to be sold. 

If the money earned any interest, it will be taxed – though this won’t necessarily result in a tax bill if it does not exceed your personal savings allowance or capital gains allowance.