An ISA (Individual Savings Account) is a wrapper around savings or investments that makes the returns tax-free. Interest earned inside it isn't taxed, investment growth and dividends inside it aren't taxed, and money you take out isn't taxed. The return comes from what you hold inside it.
£20,000the total you can pay into ISAs in the 2026-27 tax year
The main types
- Cash ISA — a savings account where the interest is tax-free. There is no investment risk to your balance. It suits money you might need in the next few years, or an emergency fund once its interest exceeds your tax-free allowance (more on that below).
- Stocks & shares ISA — a wrapper around investments such as funds and shares, where growth and dividends are tax-free. For money you can leave alone for the long term — think five years minimum — because values fall as well as rise.
- Lifetime ISA (LISA) — for a first home or retirement, with a 25% government bonus on up to £4,000 a year. It has conditions; see the box below.
- Innovative finance ISA — wraps peer-to-peer lending and similar. It is higher-risk and is normally not covered by savings compensation if borrowers default.
- Junior ISA — a separate tax-free pot for a child, with its own £9,000 annual limit in 2026-27, locked away until they turn 18 (when it becomes legally theirs).
How the allowance works
You get one £20,000 allowance across all your adult ISAs each tax year, and it resets every 6 April. Unused allowance doesn't carry forward. The Junior ISA's £9,000 is separate and belongs to the child, and a LISA's £4,000 counts as part of your £20,000, not on top of it. You can pay into more than one ISA in a year — including more than one of the same type, since the rules loosened — as long as the total stays within £20,000.
Two rules matter. First, moving an ISA means transferring, never withdrawing: every provider has a transfer process, and money moved that way keeps its tax-free status and (for previous years' money) doesn't touch this year's allowance. Withdraw it yourself and pay it back in, and you've burned allowance — or lost the tax shelter entirely. Second, some ISAs are flexible, meaning you can withdraw and replace money within the same tax year without using up more allowance — useful, but only if your provider offers it, so check before you rely on it.
Do you need one yet?
Maybe not. Everyone gets a Personal Savings Allowance — in 2026-27, £1,000 of savings interest tax-free if you're a basic-rate taxpayer, £500 at higher rate, and nothing at additional rate. Lower earners get more still: if your other income is under £17,570, a ‘starting rate for savings’ can shelter up to another £5,000 of interest. If your savings interest sits comfortably inside those allowances, an ordinary savings account at a better rate pays more than a cash ISA at a worse one.
Illustrative figures, assuming a 4% interest rate and 2026-27 allowances:
- £20,000 in ordinary savings earns £800 interest. A basic-rate taxpayer's £1,000 allowance covers it: tax bill £0. The ISA saves no tax here.
- £30,000 in ordinary savings earns £1,200. Basic rate: £200 over the allowance, taxed at 20% — £40 a year.
- The same £30,000 for a higher-rate taxpayer: only £500 is tax-free, so £700 is taxed at 40% — £280 a year. Here an ISA would save £280 a year.
The bigger your balance, the higher your tax band and the better the interest rate, the more an ISA saves. Money in an ISA stays sheltered in later years too.
The Lifetime ISA. A Lifetime ISA adds a 25% government bonus: pay in the full £4,000 and £1,000 free lands on top, every year from 18 until 50 (you must open it before you turn 40). Use it for a first home costing up to £450,000, or leave it until 60 for retirement. But withdraw for anything else and a 25% charge applies. Pay in £1,000, get the bonus: £1,250. Withdraw it unqualified and the charge is 25% of £1,250 = £312.50, leaving £937.50 — 6.25% less than you put in. The charge takes back the bonus and some of your own money, so a Lifetime ISA is not suited to an emergency fund. First-time buyers: our first-time buyer guide covers where the LISA fits.
The change coming in April 2027
Announced in the Autumn Budget 2025: from 6 April 2027, the amount you can pay into cash ISAs each year drops to £12,000 if you're under 65 — the overall £20,000 allowance stays, but the remaining £8,000 can only go into the other, investment-style types. Savers aged 65 and over keep the full £20,000 for cash. Money already sitting in cash ISAs is unaffected, and transfers of existing balances aren't blocked — the new limit bites on new contributions. For under-65 savers, 2026-27 is the last full year of the old cash ISA rules.
Common mistakes
- The wrapper doesn't determine the return; what's inside does. A cash ISA at a poor rate is still a poor account.
- A stocks & shares ISA can fall in value. It's a wrapper around investments, and investments drop as well as climb. It's for money you won't need for years — never your emergency fund. For the difference between investing and speculating, read trading vs investing first.
- Fees compound just like returns. Inside a stocks & shares ISA, platform and fund charges quietly eat growth over decades. Check what you are paying.
- ISAs aren't the only tax shelter. Pensions give tax relief on the way in but lock money away until pension age. The balance between them depends on your circumstances; our pension reality check is the other half of this conversation.
- Cash protection has a limit. UK-authorised banks and building societies carry FSCS protection of £120,000 per person, per banking licence (the limit rose from £85,000 in December 2025). Savers above the limit often spread cash across institutions.
Checklist before you open an ISA
- A starter emergency fund and expensive debt come first, because a card balance costs more than 4% tax-free earns. Our guide to clearing debt comes first if that's you; and if debt feels out of control, free help from StepChange or National Debtline comes before any of this.
- Name the goal and its date. Money needed within about five years is generally held in cash; long-term money is where investing, and the stocks & shares ISA, comes in.
- Check whether you would pay tax on your interest. Run the Personal Savings Allowance sums above; if you're well under the limit, compare rates, ISA or not.
- Compare rate, access terms, flexibility and fees.
- To move existing ISA money, transfer it rather than withdrawing it.
- A coach can help you understand this and build the habit — see the savings habit guide. Choosing specific investments or providers is regulated advice from an authorised financial adviser; for free, impartial guidance, see MoneyHelper.