Individual Savings Accounts (ISAs) let UK residents save and invest up to £20,000 per tax year completely free from Income Tax and Capital Gains Tax. Unlike most other tax reliefs, ISA gains and interest never need to be reported on your tax return.
The Annual ISA Allowance (2025/26)
The total amount you can put into ISAs each tax year is £20,000. You can split this across different types of ISA, but the combined total must not exceed the limit. The allowance resets on 6 April each year and cannot be carried forward — use it or lose it.
Types of ISA
| ISA Type | What It Holds | Key Details |
|---|---|---|
| Cash ISA | Cash savings | Interest earned is tax-free. Available from age 18. |
| Stocks & Shares ISA | Investments (funds, shares, bonds) | Gains and dividends are tax-free. Available from age 18. |
| Innovative Finance ISA | Peer-to-peer lending | Interest from P2P loans is tax-free. Available from age 18. |
| Lifetime ISA (LISA) | Cash or investments | 25% government bonus on up to £4,000/year. For first home or retirement. Age 18–39 to open. |
| Junior ISA | Cash or investments | Separate £9,000 allowance for under-18s. |
You can hold one of each type per tax year, but your total contributions across Cash, Stocks & Shares, Innovative Finance, and Lifetime ISAs must stay within £20,000.
Why ISAs Matter for Tax Planning
Without an ISA, your savings and investment income may be taxable:
- Savings interest above your Personal Savings Allowance (£1,000 for Basic Rate, £500 for Higher Rate, £0 for Additional Rate) is taxed at your marginal rate
- Dividends above the £500 dividend allowance are taxed at 8.75%, 33.75%, or 39.35%
- Capital gains above the £3,000 annual exempt amount are taxed at 18% or 24%
Inside an ISA, none of these taxes apply — no matter how large the gains become over time.
Lifetime ISA Special Rules
The Lifetime ISA deserves extra attention. You can contribute up to £4,000 per year (which counts toward your £20,000 total) and receive a 25% bonus from the government — up to £1,000 per year. However, withdrawals for anything other than a first home purchase or after age 60 incur a 25% withdrawal penalty, which means you lose the bonus and a portion of your own gains.
Flexible ISAs
Some Cash ISA providers offer flexible ISAs, which allow you to withdraw and replace money within the same tax year without it counting against your allowance. Not all providers offer this, so check before withdrawing.
Key Takeaway
ISAs are one of the most valuable and straightforward tax shelters available. If you have spare savings or investments, prioritising your ISA allowance before using taxable accounts is almost always the right move. Over many years, the compounding benefit of tax-free growth can be substantial.