What Is an ISA?
An Individual Savings Account (ISA) is a government-approved tax wrapper that allows UK residents to save and invest without paying income tax, capital gains tax, or dividend tax on the returns. Introduced in 1999, ISAs have become one of the UK's most popular savings vehicles, with HMRC data showing over 12 million adult ISA accounts subscribed each year.
The annual ISA allowance for 2025/26 is £20,000 for adults. This can be split across multiple ISA types in any combination — all Cash ISA, all Stocks and Shares ISA, or any split between types. Any unused allowance is lost at the end of the tax year (5 April) and cannot be carried forward.
There are currently five main types of ISA available to UK savers and investors. Each serves a different purpose, carries different risks, and suits different circumstances. This guide explains all five in detail, compares them side by side, and helps you decide which combination best matches your goals.
The 5 Types of ISA Explained
1. Cash ISA
Annual limit: Up to £20,000 | Risk: Very low | FSCS protected: Yes (up to £85,000)
A Cash ISA works like an ordinary savings account, except all interest earned is completely tax-free. There are three main sub-types: easy access (withdraw anytime), notice accounts (e.g., 30, 60 or 90 days' notice), and fixed-rate (higher rate but money locked for 1–5 years).
Best rates in 2025: Trading 212 has offered around 4.7% AER for easy access; Chase and other providers around 4.5%; Barclays Rainy Day ISA around 5.12% on a portion of savings. Fixed-rate 1-year ISAs from Coventry Building Society and Paragon Bank have offered up to 4.9% AER. Always check current rates as they change frequently.
Who it suits best: Savers building an emergency fund; higher and additional-rate taxpayers who have used their Personal Savings Allowance (£500/year for 40% taxpayers, £0 for 45% taxpayers); anyone who needs to access their money without investment risk.
Flexible Cash ISAs: Some providers offer "flexible" Cash ISAs, allowing you to withdraw and re-deposit money in the same tax year without losing the allowance. Not all Cash ISAs are flexible — check before opening.
2. Stocks and Shares ISA
Annual limit: Up to £20,000 | Risk: Medium to high | FSCS protected: Platform regulated; investments not capital-protected
A Stocks and Shares ISA (also called an Investment ISA) holds investments — shares, funds, ETFs, investment trusts, bonds, and gilts — in a tax-free wrapper. Any dividends, interest, and capital gains inside the ISA are completely free of UK tax, no matter how large they grow.
With the CGT annual exemption now just £3,000 (reduced from £12,300 in 2022/23), sheltering investments inside an ISA has become considerably more valuable. A portfolio of £100,000 growing to £200,000 would generate a £100,000 gain — potentially subject to 18–24% CGT outside an ISA, but entirely tax-free inside one.
Best platforms in 2025: Vanguard (0.15% fee, excellent for index funds), Freetrade (£5.99–£9.99/month, commission-free trading), Hargreaves Lansdown (0.45% but excellent range and service), AJ Bell (0.25%), InvestEngine (0% for ETF portfolios), Trading 212 (0% for ETFs).
Who it suits best: Anyone saving or investing for a goal 5+ years away; investors wanting to avoid CGT and dividend tax; those seeking long-term wealth accumulation.
3. Lifetime ISA (LISA)
Annual limit: £4,000 (within your £20,000 total) | Government bonus: 25% (max £1,000/year) | Age: 18–39 to open
The Lifetime ISA is designed for two specific purposes: buying your first home or saving for retirement. The government adds a 25% bonus on everything you contribute — so for every £4 you save, the government adds £1. The maximum bonus is £1,000 per tax year.
Using for a first home: The property must cost no more than £450,000. You must have held the LISA for at least 12 months before using it. Both Cash and Stocks and Shares LISA options are available. Moneybox, Hargreaves Lansdown, and AJ Bell are popular LISA providers.
Using for retirement: You can withdraw at age 60 (note: age 60, not 57 which is the pension minimum access age). The funds — including all bonuses — can be taken tax-free.
The penalty: Withdrawing for any other reason incurs a 25% penalty on the total withdrawal (your contribution + bonus). This effectively claws back the government bonus and deducts approximately 6.25% of your own money. For example: contribute £1,000 + receive £250 bonus = £1,250. Withdraw early: 25% penalty on £1,250 = £312.50 penalty, leaving you with £937.50 — meaning you lose £62.50 of your own money.
Who it suits best: First-time buyers saving toward a deposit; self-employed people wanting supplementary retirement savings; those under 40 who can commit to either a home purchase or retirement timeline.
4. Junior ISA (JISA)
Annual limit: £9,000 (separate from adult allowance) | Who: UK residents under 18 | Access: Child only, from age 18
Junior ISAs are a powerful long-term savings vehicle for children. Money saved grows completely tax-free and cannot be accessed until the child turns 18, when it automatically converts to an adult ISA under the child's control. The child can view the account from age 16 but cannot withdraw until 18.
Both Cash and Stocks and Shares JISAs are available. With up to 18 years of compounding at typical stock market returns, a Stocks and Shares JISA can generate substantial sums. Investing the full £9,000 annually from birth for 18 years at a 7% average return would produce a pot of approximately £320,000 by the child's 18th birthday.
Grandparents, relatives, and friends can all contribute to a child's JISA, subject to the annual limit. The account is managed by a parent or guardian until the child is 16.
Who it suits best: Parents, grandparents, or relatives wanting to build a tax-free nest egg for a child's future — whether for university, a first home deposit, or a financial head start in adulthood.
5. Innovative Finance ISA (IFISA)
Annual limit: Up to £20,000 | Risk: High | FSCS protected: Generally no
The Innovative Finance ISA holds peer-to-peer (P2P) loans and other debt-based investments within a tax-free wrapper. Interest from qualifying P2P loans is earned tax-free. IFISAs must be offered by FCA-authorised platforms.
Typical IFISA returns have ranged from 5% to 9%+ per year — higher than most Cash ISAs — but this comes with significantly greater risk. Borrowers can default on loans, and P2P platforms themselves can fail. Unlike Cash ISAs, IFISAs are not protected by the Financial Services Compensation Scheme (FSCS). If the platform fails, your money may be at risk.
Who it suits best: Experienced investors who understand the risks; those wanting higher income returns and who accept the possibility of capital loss; should not be the primary or only savings vehicle.
ISA Comparison Table
| ISA Type | Annual Limit | Risk Level | Best For | FSCS? |
|---|---|---|---|---|
| Cash ISA | £20,000 | Very Low | Emergency fund, short-term goals | Yes (£85k) |
| Stocks & Shares ISA | £20,000 | Medium–High | Long-term wealth (5+ years) | Regulated only |
| Lifetime ISA (LISA) | £4,000 | Low–High | First home / retirement (18–39) | Yes (Cash LISA) |
| Junior ISA (JISA) | £9,000 | Low–High | Children's long-term savings | Yes (Cash JISA) |
| Innovative Finance ISA | £20,000 | High | Experienced investors, P2P income | No |
ISA Transfers: The Golden Rule
One of the most important ISA rules is how to transfer between providers or types. Always use the official ISA transfer process — never withdraw money from one ISA and deposit it into another.
ISA transfers do not count against your annual allowance. When you request a transfer, your new provider handles it directly with your old provider. Previous years' ISA savings can be transferred to a new type (e.g., Cash ISA to Stocks and Shares ISA) without any tax consequences and without using your current year's £20,000 allowance.
If you withdraw money from an ISA and then try to open a new ISA with those funds, the deposit counts as a new subscription and uses up your current year's allowance. In a worst case, you could breach the £20,000 limit by accident.
ISA vs Pension: Key Differences
| Feature | ISA | Pension |
|---|---|---|
| Tax on contributions | No relief (paid from after-tax income) | Tax relief at marginal rate (20%, 40%, 45%) |
| Growth | Tax-free | Tax-free |
| Withdrawals | Fully tax-free, anytime | 25% tax-free; rest taxed as income; access from 57 (2028+) |
| Annual limit | £20,000 | £60,000 (or 100% of earnings) |
| Employer contributions | No | Yes — minimum 3% compulsory |
| Inheritance | Part of estate (IHT applies); APS for spouse | Generally outside estate (until April 2027 change) |
| Flexibility | Full — access at any time, any amount | Restricted — access from age 57 |
How to Split Your £20,000 Allowance
There is no single right answer — the best split depends on your goals, timeline, and tax situation. Here are some common approaches:
- Emergency fund first: Put 3–6 months of expenses in an easy-access Cash ISA. Then invest the rest in a Stocks and Shares ISA for long-term growth.
- First-time buyer: Put £4,000 in a LISA to get the 25% government bonus, then save the remaining £16,000 in a Cash ISA for your deposit.
- Long-term investor: Put the full £20,000 in a Stocks and Shares ISA in low-cost global index funds. This is often called the "ISA millionaire" strategy.
- Parent with children: Use your full adult ISA allowance (£20,000) for yourself, plus open a Junior ISA (£9,000 separate allowance) for your child. Both are tax-free and completely separate.
- Higher-rate taxpayer: Cash ISA is particularly valuable as your Personal Savings Allowance is only £500/year — interest above that is taxed at 40% outside an ISA.
ISA and Inheritance Tax
Despite all their tax advantages during your lifetime, ISAs do not escape inheritance tax. The full value of your ISA forms part of your taxable estate on death and is subject to IHT at 40% above your nil-rate band.
The exception is the Additional Permitted Subscription (APS): a surviving spouse or civil partner can subscribe an extra amount equal to the value of the deceased's ISA at death, in addition to their own £20,000 annual allowance. This preserves the tax-free status of the funds. However, while this prevents the "double tax" of paying IHT on an ISA and then income/CGT tax on the proceeds, the ISA assets themselves are still subject to IHT.
If reducing IHT is a priority, pensions (currently outside the estate), charitable legacies, and lifetime gifts are more effective strategies than ISAs.