What is an ISA?
The Individual Savings Account explained from scratch — including the four types and the £20,000 annual allowance.
An ISA — Individual Savings Account — is a wrapper around your savings or investments that makes all growth and income completely tax-free. You pay no income tax on interest or dividends, and no Capital Gains Tax when you sell investments. The money is yours to withdraw whenever you like.
Think of an ISA as a tax-free bubble. Whatever you put inside it is sheltered from HMRC — forever, not just while it's in the account.
Why does it matter?
Without an ISA, your investments sit in a "general investment account". Every dividend you receive is taxed above the £500 dividend allowance. Every time you sell a profitable investment, you may owe Capital Gains Tax above the £3,000 annual exempt amount. Over decades, these drags compound into a significant chunk of your wealth — going to HMRC instead of you.
Inside an ISA, none of that applies. A £10,000 gain in an ISA costs you nothing. The same gain outside an ISA could cost a higher-rate taxpayer £1,680 in CGT alone.
The £20,000 annual allowance
Each tax year (6 April to 5 April) you can put up to £20,000 into ISAs. This allowance is "use it or lose it" — you cannot carry unused allowance forward to next year. The allowance is shared across all ISA types you hold.
The ISA deadline is 5 April. After midnight on that date, any unused allowance from the current tax year disappears permanently.
The four types of ISA
| Type | Best for | Annual limit |
|---|---|---|
| Cash ISA | Tax-free interest on savings | £20,000 (shared) |
| Stocks & Shares ISA | Long-term investing | £20,000 (shared) |
| Lifetime ISA (LISA) | First home or retirement | £4,000 (counts towards £20k) |
| Junior ISA | Saving for a child's future | £9,000 (separate limit) |
Can I have more than one ISA?
Yes — you can hold multiple ISAs. Since April 2024, you can open and contribute to multiple ISAs of the same type in the same tax year. The only rule is that the total you pay in across all of them cannot exceed £20,000 (or £4,000 for the LISA portion).
Do I pay tax when I withdraw from an ISA?
No. Withdrawals from an ISA are completely tax-free. There is no tax event when you take money out. The only exception is the Lifetime ISA, which charges a 25% withdrawal penalty if you take money out for reasons other than buying a first home or retirement — but that is a penalty, not a tax.
What happens to my ISA if I die?
Your ISA loses its tax-free status on death, but your spouse or civil partner can inherit the ISA allowance through an "Additional Permitted Subscription" — meaning they can add your ISA pot to their own without it counting against their annual allowance.
This guide is for informational purposes only and does not constitute financial advice. Tax rules can change. Always check current HMRC guidance or consult a qualified financial adviser before making decisions.