ISA’s & LISA’s: The Complete Guide (Updated 2025)
If you’re looking for ways to save and grow your money while making the most of generous tax advantages in the UK, you’ve likely come across ISA’s (Individual Savings Accounts) and possibly the newer LISA’s (Lifetime Individual Savings Accounts). These products are powerful tools for building your savings pot—whether you’re hoping to buy your first home, save for retirement, or simply shield your investments from tax.
But with so many rules, types, limits, and best-practices, it’s easy to feel overwhelmed, especially if you’re just starting out. In this step-by-step guide, we cut through the jargon and show exactly how to make ISAs and LISAs work for you—no matter where you are on your personal finance journey.
What is an ISA?
There are several ISA types, each serving different goals:
Cash ISA: A safe, tax-free savings account, usually offering fixed or variable interest.
Stocks & Shares ISA: Invest in UK and global shares, funds, bonds, and more—returns are tax-free.
Lifetime ISA (LISA): Save for a first home or retirement, with a government bonus. You can invest in a Cash LISA or in a Stocks and Shares LISA, but more on this later.
Innovative Finance ISA: For peer-to-peer lending and similar alternative investments.
Junior ISA: For under-18s, with a separate annual limit. We discuss this more on the topic around child-related finances.
This article focuses on main ISAs for adults: Cash ISAs, Stocks & Shares ISAs, and Lifetime ISAs.
How to Open and Use an ISA in the UK
Step 1: Decide Your Savings Goal
Start by asking yourself:
Do I want accessible, risk-free cash savings?
Am I happy to invest for potential growth, even if values can rise and fall?
Am I saving for my first home or retirement (in which case, a LISA might be best)?
Step 2: Choose the Right ISA Type
When choosing an ISA, it’s important to match the type to your financial goals and risk tolerance. Here’s a closer look at your options:
Cash ISAs – These are savings accounts where your money earns tax-free interest. They’re ideal for emergency funds or short-term goals, such as saving for a holiday or a large purchase within a year or two. Because the money is not invested in the stock market, it’s low risk and easy to access when you need it. However, interest rates are typically lower than investment returns.
Stocks & Shares ISAs – These allow you to invest in stocks, bonds, or funds while sheltering your gains from tax. They’re best for longer-term goals, usually 5 years or more, and for savers who are comfortable with the ups and downs of the market. While there’s potential for higher returns than a Cash ISA, there’s also a risk of losing money, so it’s important to choose investments carefully and review them regularly.
Step 3: Shop Around for Providers
Compare interest rates (for cash ISAs), fees (for stocks and shares ISAs), and any bonuses (for LISAs).
Make use of trusted UK comparison sites such as MoneySavingExpert’s ISA Guide or Which? ISA Comparison.
Understanding ISA and LISA Fees: What to Watch Out For
Fees might seem small, but they can eat into your investment growth over time. Here are the main types to keep an eye on:
Platform Fees – Annual charges for using your provider, usually a percentage of your total investments.
Trading/Dealing Fees – Costs each time you buy or sell shares or funds.
Fund Management Fees (OCF) – Ongoing charges for the investment funds themselves.
Even a seemingly low 1% fee can significantly reduce your returns over 20–30 years compared to a 0.25% fee. Choosing low-cost providers and funds can make a huge difference to your long-term wealth.
Please see our favourite ISA providers (with good year-round interest rates) and lowest fees:
Step 4: Understand the Annual Allowance
Your total annual ISA allowance is £20,000 for each financial year. This can be split however you like across different types, but not exceeded.
Example splits:
£10,000 Stocks & Shares ISA, £5,000 Cash ISA, £5,000 LISA
£4,000 LISA (the LISA maximum per year), £16,000 in another ISA
Step 5: Open and Fund Your ISA
Cash ISAs can usually be opened online in 10-15 minutes.
Stocks & Shares ISAs may require identity/document checks.
Step 6: Monitor and Manage
Keep track of your total ISA contributions (don’t exceed the annual allowance).
For Stocks & Shares ISAs, review performance regularly—remember, funds can go up and down.
Shop around annually for better rates or features—you can transfer ISAs between providers.
How to Open and Use an LISA in the UK
The Lifetime ISA (LISA) was introduced in 2017 to help younger adults save for either their first home or retirement. It offers a generous government bonus of 25% on contributions, making it one of the most effective ways to boost your savings—but it comes with restrictions that mean you need to plan carefully.
I made a YouTube video explaining how LISAs work, so if you prefer to watch a video - check this one out:
Step 1: Confirm Eligibility
You must be aged 18–39 to open a LISA.
You can continue saving until age 50, but contributions must stay within the £4,000 per year limit to receive the full government bonus.
LISAs are intended for first-time home purchases or retirement savings only. Withdrawals for other purposes trigger a 25% government withdrawal penalty (effectively meaning you lose the bonus and part of your contributions).
Step 2: Decide How You’ll Save
LISAs can be held as Cash LISAs, which earn interest safely, or Stocks & Shares LISAs, which invest in the market and can grow more but carry investment risk.
Think carefully about your savings goal: a LISA is not flexible like a regular ISA. If you withdraw early for something other than a first home or retirement, you’ll lose money.
Example of the Withdrawal Penalty:
Suppose you contribute £4,000 in a year and receive the £1,000 government bonus, bringing your total to £5,000.
If you withdraw this money early for an unrelated reason, the 25% penalty applies, reducing your total to £3,750, meaning you lose £1,250—more than just the bonus.
Step 3: Consider House Price Limits
The LISA can only be used to buy a first home costing up to £450,000. This implies that you cannot use a LISA (even partially) for a purchase in excess of £450,000 - which means that you might have to withdraw the full amount and take the withdrawal penalty hit.
This can be a major limitation in expensive areas like London, where average house prices are often much higher than £450,000.
If your goal is to buy a home in a high-priced city, a LISA might not cover enough of the purchase price, so you may need additional savings or alternative options.
Step 4: Understand the Government Bonus
The government adds 25% on all contributions, up to a maximum of £1,000 per tax year.
Contributions above £4,000 do not receive the bonus.
To maximise benefits, aim to contribute the full £4,000 each year if possible.
Step 5: Shop Around for Providers
Compare interest rates for Cash LISAs and investment options and fees for Stocks & Shares LISAs.
Look for flexibility, such as easy transfers, online account management, and good customer support.
On top of the abovementioned providers, we have to include Dodl (from AJ Bell) as part of our recommended providers, due to their ultra-low fee structure, especially on Stocks & Shares products.
Step 6: Open, Fund, and Automate
LISAs can usually be opened online, but you’ll need ID verification.
Set up a standing order to make regular contributions and ensure you maximise the government bonus each year.
Step 7: Monitor and Manage Carefully
Track contributions to stay within the £4,000 annual limit.
For Stocks & Shares LISAs, review fund performance, remembering that values can go up and down.
Transfers to other providers are allowed without penalty if you find better rates or investment options elsewhere.
Frequently Asked Questions About ISAs & LISAs
Can I have more than one ISA or LISA?
Yes, you can have multiple ISAs from previous years, but in any given tax year, you may only pay into one of each type (one Cash ISA, one Stocks & Shares ISA, one LISA, etc.).
Are ISAs risky?
Cash ISAs are low risk—your money’s protected up to £85,000 per provider by the FSCS.
Stocks & Shares ISAs are not guaranteed—investments can fall as well as rise.
What if I max out my allowance?
You cannot put new money into ISAs above the annual limit, but your money keeps growing tax-free.
What happens if I withdraw from a LISA for other purposes?
You’ll pay a penalty (currently 25%), so you get back less than you put in for non-qualifying withdrawals.
Can I transfer ISAs/LISAs between providers?
Yes! This is common, but always follow your new provider’s transfer process. With LISAs, you must stick to eligible LISA providers.
Tips and Tricks: Making the Most of ISAs & LISAs
Use your allowance early in the tax year – the sooner your money is sheltered, the longer it grows tax-free.
Mix and match: Many people use a Cash ISA for emergency savings and a Stocks & Shares ISA for long-term growth.
Double up as a couple: Spouses/partners can each use their own ISA and LISA allowances.
Review regularly: Providers’ rates change – don’t stay loyal to a dud product.
Watch for fees: Especially with Stocks & Shares ISAs, check platform and fund costs.
Conclusion: ISA & LISA Saving
Mastering ISAs and LISAs makes an enormous difference to your ability to save, invest, and hit your financial milestones tax-free. The more you use these accounts to their full potential—and avoid common pitfalls—the faster your money can grow towards your first home, retirement, or other big goals.
