An ISA lets you save money without paying tax on the interest you earn

An Individual Savings Account (ISA) is a UK savings account where the interest you make stays yours — the government does not take a cut through income tax. You can hold cash, stocks and shares, or a mix of both, depending on the type of ISA you open. The catch is that you can only pay in a set amount per tax year (April to April), and you must be a UK resident to open one.

The tax-free part is the real difference. If you have a regular savings account and earn £500 in interest, you owe tax on that money at your marginal rate — 20%, 40%, or 45% depending on your income. With an ISA, that £500 stays completely yours. Over time, especially if you have a large balance or hold investments that grow, the tax savings add up.

Key Takeaways

  • An ISA is a tax-free savings account where you pay no income tax on interest or investment gains, but you can only pay in £20,000 per tax year across all your ISAs combined.
  • Cash ISAs hold money in savings; Stocks and Shares ISAs hold investments like funds and shares; Innovative Finance ISAs hold peer-to-peer loans — you pick one type per year or split your allowance between them.
  • You must be a UK resident aged 18 or over (16 for Cash ISAs) to open one, and you can only pay in during the tax year it covers.
  • Interest and investment growth in an ISA are never taxed, but you still pay capital gains tax if you sell investments outside an ISA for a profit above the annual exemption.
  • If you move house abroad or stop being a UK resident, you keep your ISA but cannot pay in new money; some providers let you keep the account open, others close it.

The three types of ISA and what each one holds

A Cash ISA works like a regular savings account — you deposit money, it sits there, and you earn interest. The difference is that interest is tax-free. You can have multiple Cash ISAs open at once, but you can only pay new money into one Cash ISA per tax year. Interest rates vary by provider, just as they do with regular accounts.

A Stocks and Shares ISA holds investments: unit trusts, investment funds, exchange-traded funds (ETFs), individual company shares, and bonds. You choose what to invest in (or pick a managed fund that does it for you), and any growth, dividends, or capital gains are tax-free. You can only pay into one Stocks and Shares ISA per tax year, but you can hold as many different investments inside it as you want.

An Innovative Finance ISA holds peer-to-peer loans — you lend money to individuals or small businesses through a platform, and the interest you earn is tax-free. These are less common and carry more risk than the other two types. Like the others, you can only pay into one per tax year.

You can split your £20,000 annual allowance between different types — for example, £10,000 into a Cash ISA and £10,000 into a Stocks and Shares ISA in the same year. But you can only pay new money into one Cash ISA, one Stocks and Shares ISA, and one Innovative Finance ISA per year. You can hold old ISAs from previous years and keep them open without paying in.

The £20,000 annual limit and how it works

Each tax year (6 April to 5 April), you can pay a maximum of £20,000 into ISAs. This is a combined limit across all your ISAs — if you pay £15,000 into a Cash ISA, you can only pay £5,000 into a Stocks and Shares ISA that same year. Any money you do not pay in that year is lost; the allowance does not roll over.

Interest and investment growth do not count toward the limit. If you pay in £10,000 and it grows to £12,000, you still have £10,000 of your allowance left to use. The limit only applies to money you actively deposit or transfer in.

If you have an old ISA from a previous year, you can keep it open and the money stays in it tax-free. You do not have to close it or move it. However, you can only pay new money into one Cash ISA and one Stocks and Shares ISA per year, so if you already have both types open, you cannot open a third one until the next tax year.

Who can open an ISA and what you need to provide

You must be a UK resident to open an ISA. Most providers require you to be 18 or over, though Cash ISAs can be opened from age 16. You will need to prove your identity (usually a passport or driving licence) and your address (a recent utility bill or bank statement). Some providers also ask for your National Insurance number.

If you move abroad, you stop being a UK resident and cannot pay new money into your ISA. Some providers let you keep the account open and access the money; others close it automatically. Check with your provider before you move. If you return to the UK and become a resident again, you can open a new ISA, but your old one remains closed.

If you are not a UK resident but have a UK address (for example, you work in the UK but are not classed as resident for tax purposes), you may not be able to open an ISA. Rules vary by provider, so contact them directly to check.

How tax-free growth works in practice

In a regular savings account, if you earn £1,000 in interest and you are a basic-rate taxpayer, you owe £200 in tax. The bank reports your interest to HMRC, and you either pay the tax or it comes out of your tax-free allowance (£1,000 per year for basic-rate taxpayers). With an ISA, that £1,000 stays completely yours — no tax bill, no reporting to HMRC.

In a Stocks and Shares ISA, if you buy shares worth £5,000 and sell them for £7,000, you have made a £2,000 gain. Outside an ISA, you would owe capital gains tax on that profit (at 10% or 20% depending on your income and the annual exemption). Inside an ISA, you owe nothing. Dividends paid by companies are also tax-free inside an ISA.

This tax-free treatment applies only to money inside the ISA. If you withdraw money and reinvest it outside an ISA, it is no longer protected. If you sell an investment in your Stocks and Shares ISA and move the cash to a regular savings account, the interest on that cash is taxable again.

Moving money between ISAs and what happens to old accounts

You can transfer money from one ISA to another — for example, from a Cash ISA to a Stocks and Shares ISA, or from one provider to another. The money stays tax-free throughout the transfer. Always ask your new provider to handle the transfer for you; do not withdraw the money yourself and then deposit it, because that counts as a new payment and uses up your annual allowance.

If you have an old ISA from several years ago and want to move it, you can do so at any time. The transfer does not use up your current year's allowance — it is treated as moving existing money, not a new payment. Some providers charge a fee to transfer out, so check before you move.

If you close an ISA, the money is no longer tax-free once it leaves the account. If you withdraw £10,000 from a Cash ISA and put it in a regular savings account, any interest you earn on that £10,000 from that point forward is taxable. The interest you earned while it was in the ISA remains tax-free.

What happens if you exceed the limit or break the rules

If you accidentally pay more than £20,000 into your ISAs in one tax year, HMRC will contact you and ask you to put the overpayment right. You can usually transfer the excess to another ISA type (if you have not already used that allowance) or withdraw it. If you do not correct it, HMRC will charge tax on the excess amount as if it were in a regular account.

If you pay into more than one Cash ISA in the same tax year, that is a breach of the rules. HMRC treats the second one as a regular savings account and taxes the interest. The same applies if you pay into more than one Stocks and Shares ISA in the same year. Providers are supposed to check this, but mistakes happen — if you realize you have done this, contact HMRC to correct it.

Ceasing to be a UK resident does not automatically trigger a penalty, but you cannot pay new money in. If you try to pay in after you have left the UK, the provider should refuse it. If they do not catch it, HMRC will tax the money as if it were in a regular account.

Frequently Asked Questions

Can I have more than one ISA open at the same time?

Yes. You can hold multiple old ISAs from previous years and keep them all open. In the current tax year, you can only pay new money into one Cash ISA, one Stocks and Shares ISA, and one Innovative Finance ISA — but you can split your £20,000 allowance between them. Once a new tax year starts, you can open additional accounts if you want.

What happens to my ISA if I move abroad?

You stop being a UK resident and cannot pay new money in. Some providers let you keep the account open and access your money; others close it. Contact your provider before you move to find out their policy. If you return to the UK later, you can open a new ISA, but your old one remains closed.

Is the money in my ISA protected if the bank fails?

Yes. ISA balances are covered by the Financial Services Compensation Scheme (FSCS) up to £85,000 per person per bank, the same as regular savings accounts. If a bank collapses, your ISA money is protected up to that limit.

Can I withdraw money from my ISA whenever I want?

Yes, with a Cash ISA. You can withdraw money at any time, just like a regular savings account. With a Stocks and Shares ISA, you can sell your investments and withdraw the cash, but you cannot withdraw individual shares or funds — you have to sell them first. Some providers may have notice periods or charges.

Do I have to use my full £20,000 allowance every year?

No. If you only pay in £5,000, that is fine — you do not have to use the full amount. However, any allowance you do not use that year is lost. It does not carry over to the next tax year, so you start fresh with £20,000 on 6 April.