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It’s been a rocky road for the individual savings account, more commonly known as an ISA.Ìý

ISAs have a complicated past due to its specific terms and conditions coupled with historically low interest rates, making its tax-free benefit feel unreachable.Ìý

But things have changed and interest rates have now risen, meaning the ISA has a new lease of life and its £20,000 tax-free allowance is now attractive.Ìý

So it feels likeÌý a good time to tackle some common misconceptions about the ISA as it is always worth considering when you compare savings accounts.Ìý

Myth: ISAs can only be opened by someone over the age of 18

A cash ISA can actually be opened by someone aged 16 and over, so ISAs are not purely for adults. If a 16-year-old opens an ISA then they are able to use the £20,000 ISA allowance in the same way as an adult. However, you must be 18 or over to open a lifetime, stocks and shares or innovative finance ISA.Ìý

Adults can also open a junior ISA for their children but the money belongs to the child. This means the child can start to manage it when they turn 16 and then withdraw the money on their 18th birthday. The ISA allowance does differ though, as junior ISAs can only have up to £9,000 per tax year.Ìý

Myth: An ISA can only be used at the start of the tax yearÌý

An ISA can be opened at any time of the year, so this myth definitely needs to be debunked. The confusion lies around the tax year dates, as this is when the ISA allowance is renewed.Ìý

For example, the previous tax year ended on April 5, 2023 and the new one started on April 6, 2023. When the new tax year starts, so does your new ISA allowance, which currently stands at £20,000. But you can use this allowance at any time during the tax year.Ìý

You might have heard of the term ‘ISA season’ and this typically starts in February until the end of the tax year in April. ISA season is popular as it reminds people to use up their allowance before April 6. But it doesn’t mean you have to wait until this time, an ISA can be opened whenever you wish.Ìý

Myth: You can only have one ISA each tax yearÌý

This is a popular misconception as many people believe they only get one ISA with the £20,000 allowance. However, this isn’t the case as you can open a variety of ISAs and spread the £20,000 among the different accounts. The only thing you can’t do is open multiple ISAs of the same type, so for instance you can’t have three cash ISAs in one year.Ìý

But, you could have £6,000 in a cash ISA, £4,000 in a lifetime ISA and then the remaining £10,000 in a stocks and shares ISA if you wish.Ìý

Myth: ISAs aren’t worthwhile because of the Personal Savings AllowanceÌý

This myth is one that led to many people avoiding the ISA, as low interest rates made the tax-free saving redundant. If you are a basic-rate taxpayer your personal savings allowance is £1,000 and it’s £500 for higher-rate taxpayers, which is separate from the ISA allowance, and allows you to earn interest up to this amount tax-free.

However, if your savings’ interest is above £1,000 then you’ll start to pay tax. This is when it’s a good time to consider an ISA. Previously, rates were so low that you would need a large savings pot to beat the savings allowance. But today, with interest rates on savings accounts rising to 6%, a basic rate taxpayer only needs a savings pot of £16,667 to start paying tax.Ìý

It’s also worth exploring the £5,000 starting savings rate if you are on a low income, as this will impact the tax on your savings.Ìý

Myth: Money in an ISA cannot be movedÌý

This is a tricky myth, as for some ISAs this is the case. However, some providers offer flexible ISAs which mean you can withdraw the money and continue to earn interest on the remaining amount.Ìý

So, let’s say you deposit £20,000 into an ISA but then need to withdraw £5,000. A flexible ISA will mean you still have a £5,000 allowance but other ISAs might not allow this as you originally used up the allowance. It’s always a good idea to check the specific terms and conditions for each provider.Ìý

Myth: ISAs are only for people who have significant savingsÌý

It’s easy to see why this myth is popular as the £20,000 allowance can feel daunting. However, you don’t need to use up the entire allowance each year and you can deposit as much as you wish. Some ISAs allow you to open them with a deposit of £500 or £1,000.Ìý

And, don’t forget about the lifetime ISA, which is designed for people saving for their first home or retirement. You can only deposit up to £4,000 each year, so this is a good one for smaller amounts towards a bigger savings goal.Ìý

Myth: You have to keep the same ISA for many years

Throughout your lifetime you can have as many ISAs as you wish, so this means you could open a new cash ISA every year (but remember you can’t pay into more than one of the same type each tax year). It’s always a good idea to see what rates are being offered and transfer an ISA to a new provider if it suits your needs better.Ìý

However, there are a few rules around ISA transfers and there could be fees involved, so always do your research first.