An Individual Savings Account (ISA) is a tax-free wrapper for your savings or investments. Any interest, dividends, or capital gains earned inside an ISA are completely free from UK tax. The annual allowance is £20,000, which you can split across different types of ISA as you see fit.
Types of ISA
There are four main types, each with different characteristics:
Cash ISA
Works like a normal savings account but the interest is tax-free. Available as easy access, fixed rate, or notice accounts. Useful for higher earners whose savings interest exceeds the Personal Savings Allowance, and for anyone who wants a simple, risk-free home for their money.
Since April 2024, you can open and pay into multiple Cash ISAs in the same tax year. Previously, you were limited to one per year. This means you can shop around for the best rates across providers without worrying about the old restrictions.
Stocks and Shares ISA
Lets you invest in funds, shares, bonds, and other securities with all growth and income tax-free. No capital gains tax when you sell, no income tax on dividends. Over the long term (5+ years), stock market investments have historically outperformed cash savings, though with more volatility along the way.
You can invest in individual shares if you're confident, but most people use funds — either actively managed or passive index trackers. Platforms like Vanguard, AJ Bell, Hargreaves Lansdown, and InvestEngine offer Stocks and Shares ISAs with varying fee structures.
Lifetime ISA
Designed for first-time buyers and retirement saving. You can save up to £4,000 per year (within the overall £20,000 ISA allowance) and the government adds a 25% bonus. Use it to buy a first home (worth up to £450,000) or withdraw after age 60. Early withdrawal for any other reason incurs a 25% penalty, which effectively costs you more than the bonus.
Innovative Finance ISA
Holds peer-to-peer lending investments. Returns can be higher than cash but so is the risk — your capital isn't protected by the FSCS. These are niche products and not suitable for most savers.
The £20,000 allowance
You get £20,000 per tax year (6 April to 5 April) to spread across all ISA types however you like. Put £10,000 in a Cash ISA and £10,000 in a Stocks and Shares ISA. Or the full amount in one type. It's entirely your choice.
The Lifetime ISA has its own sub-limit of £4,000, which counts towards the overall £20,000. So if you put £4,000 in a LISA, you have £16,000 left for other ISAs.
Unused allowance doesn't carry forward. If you only save £5,000 this year, you can't put £35,000 in next year. Use it or lose it.
Transferring ISAs
You can transfer existing ISA savings between providers and between types (for example, Cash ISA to Stocks and Shares ISA) without affecting your allowance. The transfer must be done through the new provider's transfer process — if you withdraw the money yourself and re-deposit it, it counts against your current year's allowance.
This is a common mistake. Never withdraw ISA money and redeposit it if you want to keep the tax-free status. Always use the official transfer process.
FSCS protection
Cash ISAs are protected by the Financial Services Compensation Scheme up to £85,000 per person per banking group. If you have substantial savings, spread them across different banking groups to ensure full protection. Stocks and Shares ISAs are also covered up to £85,000 if the platform fails — though this covers the platform's insolvency, not investment losses.
Who benefits most from ISAs?
Higher and additional rate taxpayers benefit most, because they have smaller Personal Savings Allowances and face higher tax rates on investment income. But even basic rate taxpayers should consider ISAs for long-term investing, because the tax-free compound growth becomes increasingly valuable over decades.