First introduced in the UK on 6 April 1999, ISAs have proved hugely successful. Today £257 billion, 22% of all household savings, are held in cash ISAs. So what exactly are they, why are they so popular and, importantly, are they still useful even after the introduction of the Personal Savings Allowance?

What is an ISA?

ISA is an abbreviation for Individual Savings Account. There are two types – cash ISAs and stocks and shares ISAs. The reason that they’re so good is because all the interest that you earn – now and into the future - is tax free!

How much can you save in an ISA?

In this tax year, running from 6 April 2016 to 5 April 2017, you can save up to £15,240 in an ISA. Although you can only open one cash ISA and one stocks and shares ISA each year, there’s no limit on how you divide the £15,240 between the two types of ISA account.

Apart from the annual limit – also known as the ISA allowance – there’s no lifetime limit on the total amount of savings you can build up in ISAs and no limit on the amount of interest you can earn tax free.

How are ISAs affected by the new Personal Savings Allowance?

On 6 April 2016, the Government introduced a new Personal Savings Allowance. This allows basic rate tax payers in the UK to earn up to £1,000 of interest on their non-ISA savings without paying tax. Higher rate tax payers can earn up to £500 of interest tax-free.

Interest earned on ISAs is not included in the Personal Savings Allowance and it is always tax-free.

This means ISAs will remain a key part of the savings landscape, letting individuals with a long-term horizon build up significant tax-free savings over time and protecting even relatively modest pots of savings from tax when interest rates climb again.

To find out more about ISAs and how they work, visit gov.uk and read this helpful overview.