ISAs explained
An ISA lets your savings and investments grow completely free of UK tax. This guide covers the types of ISA, the £20,000 allowance, and how to make the most of the tax-free wrapper.
What an ISA is
An Individual Savings Account (ISA) is a tax-free wrapper: any interest, dividends or capital gains earned inside it are completely free of UK tax, and you never declare it. You can pay in up to £20,000 per tax year (2025/26) across all your ISAs combined. There's no tax on the way out either, withdrawals are tax-free at any time (subject to each product's rules).
Cash, Stocks & Shares, LISA and more
- Cash ISA: Like a tax-free savings account. Best for short-term money and emergency funds; returns track interest rates.
- Stocks & Shares ISA: Invest in funds, shares and bonds. Higher potential returns over the long run, with risk of falls. Best for 5+ year goals.
- Lifetime ISA (LISA): A 25% government bonus for a first home or retirement, with rules and a withdrawal penalty. See the dedicated LISA calculator.
- Innovative Finance & Junior ISA: IFISA holds peer-to-peer loans (higher risk); Junior ISA is a tax-free pot for under-18s with its own allowance.
Using your £20,000 wisely
The £20,000 allowance resets every 6 April and can't be carried over, use it or lose it. You can split it across different ISA types in the same year. Since April 2024 you can pay into multiple ISAs of the same type in one year, giving more flexibility to chase the best rates. A "flexible" ISA even lets you withdraw and replace money in the same tax year without losing the allowance.
Cash for soon, shares for later
The tax saving compounds
Outside an ISA, savings interest above your Personal Savings Allowance and investment gains above the annual exempt amount are taxable, and those allowances have shrunk. Inside an ISA, none of it is taxed, so more of your return stays invested and compounds. Over decades, sheltering growth from tax can add a substantial amount to your pot.
Common mistakes
- Leaving the allowance unused. It resets each year and can't be reclaimed. Contribute what you can before 5 April.
- Holding long-term money in cash. Over many years, cash often loses to inflation; investments historically do better for long horizons.
- Chasing a poor Cash ISA rate. Compare rates and switch via transfer (don't withdraw and re-deposit, which uses your allowance).
- Forgetting flexible ISA rules. With a non-flexible ISA, replacing a withdrawal counts as a new contribution against your allowance.