What Is an ISA?
A guide to Individual Savings Accounts — the UK's main tax-free savings and investment wrapper, including Cash ISAs, Stocks & Shares ISAs, LISAs, and the latest rule changes.
What Is an ISA?
An ISA (Individual Savings Account) is a tax-free wrapper available to UK residents aged 18 or over (16+ for Cash ISAs). Any interest, dividends, or capital gains earned inside an ISA are completely free from UK tax.
The Annual Allowance
You can put up to £20,000 into ISAs each tax year (6 April – 5 April). This is your ISA allowance and it resets every year. If you do not use it, you lose it — allowance does not roll over.
You can split the £20,000 across different ISA types however you like, as long as the total does not exceed the limit.
Types of ISA
| ISA Type | What it holds | Key details |
|---|---|---|
| Cash ISA | Cash savings | Like a savings account but interest is tax-free. Rates vary; easy-access or fixed-term available. |
| Stocks & Shares ISA | Investments | Hold funds, shares, bonds, ETFs. Returns are tax-free. Capital at risk. |
| Lifetime ISA (LISA) | Cash or investments | Age 18–39 to open. Save up to £4,000/year. Government adds 25% bonus (up to £1,000/year). For first home or retirement (age 60+). 25% penalty for other withdrawals. |
| Innovative Finance ISA (IFISA) | Peer-to-peer loans | Interest from P2P lending is tax-free. Higher risk than cash; not FSCS-protected. |
The Multiple ISA Rule Change (2024–25 onwards)
Before April 2024, you could only pay into one ISA of each type per tax year. From the 2024–25 tax year onwards, you can pay into multiple ISAs of the same type in the same year — as long as your total across all ISAs stays within £20,000.
This means you can, for example, hold Cash ISAs with three different banks in the same tax year to chase the best rates.
Cash ISA vs. Savings Account
With the Personal Savings Allowance (PSA), basic-rate taxpayers already get £1,000 of interest tax-free, and higher-rate taxpayers get £500. So do you still need a Cash ISA?
- If your savings interest is below your PSA, a standard savings account may offer a better rate
- If your savings are large enough that interest exceeds the PSA, a Cash ISA shields the excess from tax
- ISA tax-free status persists year after year — even if rates or your tax position change in the future
Stocks & Shares ISA — The Basics
A Stocks & Shares ISA is an investment wrapper. You choose what to invest in — the ISA is just the tax-free "envelope" around it. Inside, you might hold:
- Index funds (e.g. a FTSE All-World tracker)
- Individual shares (e.g. listed on the London Stock Exchange)
- Bonds and gilts
- Exchange-traded funds (ETFs)
All gains and dividends are free from Capital Gains Tax and Dividend Tax. The value of investments can go down as well as up.
Lifetime ISA — First Home or Retirement
The LISA is particularly useful for first-time buyers:
- Save up to £4,000 per year (counts towards your £20,000 ISA allowance)
- Government adds a 25% bonus — that is up to £1,000 free money per year
- Use it towards your first home worth up to £450,000, or withdraw at age 60+
- Withdrawing for any other reason incurs a 25% penalty on the total withdrawal (which actually means you lose more than the bonus)
Practical Tips
- Use your allowance early in the tax year to maximise tax-free growth
- Transfer old ISAs to better-rate providers without affecting your current year allowance
- Name beneficiaries — ISAs lose their tax-free status on death unless transferred to a spouse/civil partner via the Additional Permitted Subscription (APS)
Explain Like I'm 5
An ISA is like a special piggy bank where the grown-ups in charge (the government) promise they will never take any of your pocket money out of it. You can put up to a certain amount in each year, and everything it earns stays yours — no sharing required!
Key Takeaways
- ISAs let you save or invest up to £20,000 per tax year completely free from UK income tax, capital gains tax, and dividend tax.
- From 2024–25, you can pay into multiple ISAs of the same type in one tax year.
- The Lifetime ISA gives a 25% government bonus (up to £1,000/year) for first-time buyers or retirement savings.
- Unused ISA allowance does not carry over — use it or lose it each tax year.
Track your ISA allowance usage across all providers with CoreFi.
Get started freeEducational only - not financial advice