An ISA (Individual Savings Account) is a savings or investment account where you pay no UK income tax on interest, dividends or capital gains. The annual ISA allowance is £20,000. Any money deposited within the ISA wrapper grows tax-free regardless of how large it becomes.
The main types of ISA
- Cash ISA: works like a savings account but interest is tax-free. Available at banks and building societies. Variable or fixed rate. Best for short to medium-term savings.
- Stocks and Shares ISA: allows you to invest in shares, bonds and funds tax-free. Values can go up or down. Best for longer-term goals (5+ years).
- Lifetime ISA (LISA): for adults aged 18-39. Government adds a 25% bonus on contributions up to £4,000 per year. Can only be used to buy a first home or accessed at age 60.
- Innovative Finance ISA: for peer-to-peer lending. Higher risk, not covered by FSCS in the same way as cash ISAs.
How the £20,000 allowance works
You can split your £20,000 allowance across different ISA types in the same tax year. The allowance resets on 6 April each year. Unused allowance does not carry forward — it is lost permanently.
Why tax-free matters
Outside an ISA, interest on savings above the Personal Savings Allowance is subject to income tax. On investments, dividends and capital gains above allowances are taxable. Inside an ISA, none of these taxes apply — ever, regardless of how much the account grows.
A worked example: Cash ISA vs standard savings
At £20,000 in savings at 4.5% interest, annual interest is £900. In a standard account, £400 above the Personal Savings Allowance is taxable at your marginal rate. In a Cash ISA: no tax at any balance. The advantage grows as savings grow.
General guidance only — not regulated financial advice.