What Is an ISA?
An Individual Savings Account (ISA) is a government-backed savings or investment wrapper that allows UK residents to save and invest without paying income tax on interest, dividends, or capital gains. ISAs were introduced in 1999, replacing Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs), and have since become one of the most popular savings vehicles in the UK with over 12 million accounts held.
The key tax advantages of ISAs are substantial. A higher-rate taxpayer saving £20,000 in a cash ISA at 5% earns £1,000 in interest tax-free. Outside an ISA, they would pay 40% tax on interest above the £500 personal savings allowance — a saving of £200 per year in this example. For Stocks & Shares ISA investors, all capital gains and dividends are sheltered from Capital Gains Tax and Dividend Tax, which can represent far larger savings as portfolios grow.
ISA Types and Rules for 2025/26
Cash ISA
Annual limit: Up to your full £20,000 ISA allowance
Tax benefit: Interest earned is completely tax-free
Types: Easy access, notice accounts, fixed-rate bonds
Who it suits: Anyone wanting safe, tax-free interest — particularly higher-rate taxpayers who have used their Personal Savings Allowance (£500/year for 40% taxpayers)
Since April 2024, you can open multiple Cash ISAs with different providers in the same tax year, providing your total subscriptions do not exceed £20,000. Many providers also offer "flexible" Cash ISAs, which allow you to withdraw and re-deposit money in the same tax year without losing the allowance.
Stocks and Shares ISA
Annual limit: Up to your full £20,000 ISA allowance
Tax benefit: No Capital Gains Tax, no Dividend Tax on investments held within the ISA
Who it suits: Investors with a medium to long-term horizon (5+ years) who want to grow wealth without tax drag
Investments can include individual shares (UK and international), funds (unit trusts, OEICs, ETFs), investment trusts, bonds, and gilts. Annual platform fees typically range from 0.15% to 0.45% of portfolio value, plus fund charges. The capital gains tax annual exemption has been reduced to just £3,000 from 2024/25, making the CGT shelter of a Stocks and Shares ISA considerably more valuable.
Lifetime ISA (LISA)
Annual limit: £4,000 (counts within your £20,000 total)
Government bonus: 25% on contributions, up to £1,000/year
Eligibility: UK residents aged 18–39
Uses: First home purchase (property up to £450,000) or retirement from age 60
The LISA is one of the most generous government savings incentives available. Over 32 years of maximum contributions (ages 18–39 inclusive), you could receive £32,000 in government bonuses. Penalty warning: Withdrawing for any purpose other than buying a first home or retirement incurs a 25% penalty on the total withdrawal (including bonus), which effectively claws back the bonus and deducts around 6.25% of your own contributions.
Junior ISA (JISA)
Annual limit: £9,000 (separate from adult ISA allowance)
Who: UK residents under 18 who do not have a Child Trust Fund
Tax benefit: All interest and growth is tax-free; turns into adult ISA at 18
JISAs are an excellent long-term savings vehicle for children. Money cannot be accessed until age 18, providing a disciplined saving environment. Both Cash JISAs and Stocks and Shares JISAs are available. Grandparents, relatives, and friends can contribute to a child's JISA up to the annual limit.
Innovative Finance ISA (IFISA)
Annual limit: Up to your full £20,000 ISA allowance
Tax benefit: Peer-to-peer lending interest is tax-free
Risk level: Higher than Cash ISA — capital at risk; not FSCS protected in most cases
The IFISA allows tax-free returns from peer-to-peer lending and crowdfunded debt. Platforms that offer IFISAs must be authorised by the FCA. Expected returns can be higher than Cash ISAs (5–9%) but with significantly higher risk, including the risk of borrower defaults and platform failure. Not recommended as a primary savings vehicle.
ISA Subscription Rules Explained
Understanding the ISA rules helps you maximise your allowance without making costly mistakes:
- Annual allowance: £20,000 total across all ISAs in a tax year. You cannot subscribe more in total, regardless of how many ISA accounts you have.
- Multiple ISAs: Since April 2024, you can open multiple ISAs of the same type with different providers in the same tax year.
- No carry-forward: Unused ISA allowance is lost at the end of the tax year (5 April) and cannot be used in a future year.
- Transfers: You can transfer existing ISA balances from previous years between providers without it counting as a new subscription — provided you use an official ISA transfer form.
- LISA counting: LISA contributions count within your £20,000 overall ISA allowance. If you contribute £4,000 to a LISA, you have £16,000 remaining for other ISAs.
- Flexible ISAs: Some providers offer flexible ISAs that allow you to replace withdrawn funds in the same tax year without losing the allowance. Not all ISAs are flexible — check with your provider.
- Residency: You must be a UK resident to open and contribute to an ISA. Crown employees posted overseas and their spouses are also eligible.
Best Cash ISA Rates 2025/26
The following rates were among the most competitive available in early 2026. Rates change frequently — always compare current rates on money comparison sites before opening an account.
| Provider | Type | AER Rate | Access |
|---|---|---|---|
| Plum | Easy Access Cash ISA | 5.15% | Instant |
| Trading 212 | Easy Access Cash ISA | 5.00% | Instant |
| Nationwide | FlexDirect ISA | 4.75% | Instant |
| Coventry Building Society | 1-Year Fixed ISA | 4.90% | Fixed term |
| Paragon Bank | Double Access ISA | 4.80% | 2 withdrawals/year |
| Yorkshire BS | Online ISA | 4.65% | Instant |
Best Stocks and Shares ISA Platforms
For Stocks and Shares ISAs, platform choice matters as much as investment selection. The best platforms combine low fees with strong fund choice and user-friendly tools:
| Platform | Annual Fee | Best For |
|---|---|---|
| Vanguard | 0.15% (capped at £375) | Low-cost index fund investing |
| Freetrade | £4.99/month (Basic ISA) | Cost-conscious stock pickers |
| AJ Bell | 0.25% (capped at £3.50/month for funds) | Balanced DIY investors |
| Hargreaves Lansdown | 0.45% (capped at £45/year for shares) | Wide fund choice, excellent service |
| InvestEngine | 0% platform fee | ETF-only investors |
ISA vs Pension: Which Is Better?
Both ISAs and pensions are highly tax-efficient, but they work differently:
| Feature | ISA | Pension |
|---|---|---|
| Tax on contributions | No tax relief (contributions from post-tax income) | Tax relief at your marginal rate (20%, 40%, or 45%) |
| Tax on growth | Tax-free | Tax-free |
| Tax on withdrawal | Tax-free (no restrictions) | 25% tax-free lump sum; remainder taxed as income |
| Access age | Any time | Currently 55 (rising to 57 from 2028) |
| Annual limit | £20,000 | £60,000 (Annual Allowance, or 100% of earnings) |
| Employer contributions | No | Yes — legally required minimum 3% employer contribution |
| Inheritance | Passes to spouse/civil partner as ISA ("inherited ISA"); others pay IHT | Generally outside estate for IHT purposes |
The verdict: For higher-rate taxpayers, pensions offer immediate tax relief that ISAs cannot match — a 40% taxpayer contributing £800 to a pension effectively receives £1,000 in their pension pot through tax relief. For basic-rate taxpayers, the difference is smaller. Ideally, use both: maximise employer-matched pension contributions first, then use ISAs for accessible tax-free savings and Stocks and Shares ISAs for long-term wealth building.
How Much Tax Can You Save with an ISA?
The tax saving from an ISA depends on your tax bracket and the type of returns your ISA generates:
- Basic-rate taxpayer, Cash ISA at 5%: £20,000 generates £1,000 interest. First £1,000 is covered by the Personal Savings Allowance anyway (basic rate), so ISA saves nothing on the first account — but the PSA was cut to £500 for higher-rate taxpayers and eliminated for additional-rate taxpayers.
- Higher-rate taxpayer, Cash ISA at 5%: £1,000 interest, with £500 PSA, means £500 taxable interest outside ISA at 40% = £200 tax saved per year on £20,000.
- Stocks and Shares ISA, £20,000 growing to £100,000: An £80,000 gain would be fully exempt from Capital Gains Tax inside the ISA. At the current 18/24% CGT rates (on a gain above the £3,000 exemption), this could save £13,860–£18,480 in CGT on a realised gain of £80,000.
- Dividend income in ISA: The Dividend Allowance is now just £500/year. A portfolio generating 3% dividends on £100,000 = £3,000, of which £2,500 would be taxable at 8.75% (basic), 33.75% (higher) or 39.35% (additional) outside an ISA. Inside an ISA: entirely tax-free.
Bed and ISA: Moving Investments Into Your Tax Wrapper
A "Bed and ISA" (sometimes called "Bed and SIPP" for pensions) is a strategy where you sell investments held in a general investment account and immediately repurchase them inside a Stocks and Shares ISA. This "wraps" the investment in a tax-free shelter, protecting future gains and income from CGT and Dividend Tax.
Key considerations:
- The sale outside the ISA crystallises any existing gain — which may be taxable if it exceeds your £3,000 CGT exemption.
- Timing the Bed and ISA near the start of the tax year makes best use of the full annual ISA allowance.
- You can only move up to £20,000 per tax year (or remaining ISA allowance).
- Some platforms facilitate Bed and ISA as a single transaction with reduced market risk; others require manual sell/buy steps.