ISA (Individual Savings Account) Explained
A tax-free wrapper for your savings and investments. You can put up to £20,000 per year into ISAs, and all interest, dividends and capital gains within them are completely tax-free.
What is an ISA?
An Individual Savings Account is a tax-efficient savings or investment account available to UK residents aged 18 or over (16 for Cash ISAs). Any returns generated inside an ISA are free from Income Tax, Capital Gains Tax and dividend tax.
The annual allowance for 2025-26 is £20,000 across all your ISA accounts combined. This allowance resets every 6 April and cannot be carried forward.
How it works
There are four main types of ISA:
| Type | What it holds |
|---|---|
| Cash ISA | Cash deposits earning interest, tax-free |
| Stocks and Shares ISA | Shares, funds, bonds, ETFs with tax-free gains and dividends |
| Lifetime ISA (LISA) | Save for first home or retirement. 25% government bonus up to £1,000/year. Max £4,000/year (counts within £20,000 total) |
| Innovative Finance ISA | Peer-to-peer lending, tax-free interest |
You can split the £20,000 allowance between different ISA types. For example, £10,000 in a Cash ISA and £10,000 in a Stocks and Shares ISA. From April 2024, you can open multiple ISAs of the same type in the same tax year.
Real example
Amy is a higher rate taxpayer (40%) and puts £20,000 into a Stocks and Shares ISA each year. After 10 years, her ISA has grown to £280,000, including £80,000 in gains and £15,000 in accumulated dividends.
Outside an ISA, Amy would owe CGT of up to 20% on the gains (up to £16,000) and dividend tax of 33.75% on dividends above the £500 allowance. Inside the ISA, she pays nothing. The total tax saving over 10 years could exceed £20,000.
Who does this affect?
Any UK resident aged 18 or over (16 for Cash ISAs) can open an ISA. ISAs are especially valuable for higher and additional rate taxpayers who would otherwise pay 40% or 45% tax on savings interest. Even basic rate taxpayers benefit once their savings interest exceeds the £1,000 Personal Savings Allowance.
HMRC source
gov.uk/individual-savings-accounts covers ISA types, allowances and rules for opening and transferring accounts.
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