An ISA is a British savings account where the interest you earn is not taxed

ISA stands for Individual Savings Account. It is a type of savings account offered by banks and building societies in the UK. The defining feature is that any interest you earn on the money you deposit is completely tax-free — you do not pay income tax on those earnings, no matter how much interest accumulates.

This is different from a regular savings account, where interest is technically taxable income. In practice, many savers fall below the tax-free allowance and pay nothing anyway, but an ISA removes that uncertainty entirely. The interest is yours to keep without any tax bill at the end of the year.

ISAs have been available since 1999 and are regulated by HM Revenue & Customs (HMRC). They are not a special investment product — they are ordinary savings accounts with a tax wrapper around them.

Key Takeaways

  • Interest earned in an ISA is completely tax-free, with no tax return required or tax bill at the end of the year.
  • You can hold only one Cash ISA per tax year, though you can switch to a different provider if you move your money before the end of the tax year.
  • The annual deposit limit is £20,000 across all your ISAs combined, whether they are Cash ISAs, Stocks and Shares ISAs, or Innovative Finance ISAs.
  • You must be a UK resident and at least 18 years old to open a Cash ISA, though Junior ISAs exist for children under 18.
  • Interest rates on ISAs vary by provider and change over time, so comparing rates before opening an account will affect how much tax-free interest you earn.

How the tax-free interest works in practice

When you deposit money into a Cash ISA, the bank pays you interest just as it would on any savings account. The difference is that HMRC does not count that interest as taxable income. You do not report it on a tax return, and you do not owe tax on it.

This matters most if you are a higher-rate taxpayer. If you earn enough to pay 40% income tax, interest on a regular savings account would be taxed at 40%. On an ISA, that same interest is taxed at 0%. For a basic-rate taxpayer paying 20%, the saving is smaller but still real. Even for someone below the tax-free allowance, an ISA removes the need to track and report the interest.

The tax-free status applies only to interest earned while the money is in the ISA. If you withdraw money and deposit it into a regular account, any interest earned after that point is taxable again.

The annual deposit limit and how it works across account types

You can deposit up to £20,000 per tax year across all your ISAs combined. This is a single limit that applies whether you have one ISA or several different types.

There are three main types of ISA: Cash ISA (ordinary savings), Stocks and Shares ISA (investment account), and Innovative Finance ISA (peer-to-peer lending). If you put £12,000 into a Cash ISA and £8,000 into a Stocks and Shares ISA in the same tax year, you have used your full £20,000 allowance. You cannot deposit more until the next tax year begins on 6 April.

The limit resets each tax year. Money you deposited in a previous year does not count against your new year's limit, and interest earned does not count either. Only new deposits count toward the £20,000 ceiling.

Restrictions on holding multiple Cash ISAs

You can hold only one Cash ISA per tax year. This means you cannot open a second Cash ISA with a different bank while your first one is still active in the same tax year. If you try, the second bank will reject the application.

However, you can switch. If you open a Cash ISA in April and then find a better interest rate in August, you can move your money to the new provider. The key is that you must move the entire balance — you cannot keep both accounts running at the same time. Once the transfer is complete, you can open a new Cash ISA with another bank if you wish, as long as it is still the same tax year.

This one-per-year rule applies only to Cash ISAs. You can hold a Cash ISA and a Stocks and Shares ISA and an Innovative Finance ISA all at the same time, as long as your total deposits across all three do not exceed £20,000 in the tax year.

Who can open a Cash ISA and what you need

To open a Cash ISA, you must be a UK resident and at least 18 years old. Some banks may have additional requirements, such as a UK address or a UK bank account, but these vary by provider.

You will need to prove your identity and address. Most banks do this online using your passport or driving licence and a recent utility bill or bank statement. Some may ask for additional documents if they cannot verify you through the standard route.

If you are under 18, you cannot open a Cash ISA, but you can open a Junior ISA instead. A parent or guardian opens and manages it on your behalf. The annual deposit limit for a Junior ISA is £9,000, and the money becomes yours to control when you turn 18.

Interest rates and how they compare to regular savings accounts

Interest rates on Cash ISAs vary widely by provider and change frequently. Some banks offer rates that are competitive with the best regular savings accounts; others offer lower rates in exchange for the tax-free status. The rate you receive depends on the bank, the type of account (fixed-rate or variable), and current market conditions.

To decide whether an ISA makes sense for you, compare the after-tax return of a regular savings account against the tax-free return of an ISA. If a regular account offers 5% interest and you pay 20% tax on that interest, your actual return is 4%. If an ISA offers 4.5% tax-free, the ISA is better. If the ISA offers 4%, the regular account is better — unless you are a higher-rate taxpayer, in which case the ISA's 4% beats the regular account's 4% after tax.

Interest rates change over time, so the best rate today may not be the best rate next month. Before opening an account, check comparison websites or contact banks directly to see current rates.

Moving money between ISAs and what happens to your interest

If you want to move your money from one Cash ISA to another, you can do so within the same tax year. The process is called a transfer. You contact the new bank and ask them to transfer your balance from the old bank. The old bank will send the money directly to the new bank, and your account closes.

The key point is that a transfer does not count as a new deposit. The money you move keeps its tax-free status, and it does not use up any of your £20,000 annual allowance. Only new money you deposit yourself counts toward the limit.

Interest you have already earned remains tax-free. Interest earned after the transfer is also tax-free, as long as it is earned in the new ISA.

What happens if you move abroad or stop being a UK resident

If you move abroad, you can no longer open new ISAs or pay new money into existing ones. However, you can keep your current ISA open and continue to earn tax-free interest on the money already in it, as long as you remain a UK resident for tax purposes.

The definition of UK resident for ISA purposes is complex and depends on where you live and work. If you are unsure whether you still count as a UK resident, contact HMRC or your bank before making any changes to your account.

Frequently Asked Questions

Do I have to pay tax on ISA interest?

No. Interest earned in an ISA is completely tax-free. You do not report it on a tax return, and you do not owe any tax on it, no matter how much interest accumulates or what your income is.

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

No, you can hold only one Cash ISA per tax year. However, you can switch to a different provider by transferring your balance, and once the transfer is complete, you can open a new Cash ISA elsewhere in the same tax year. You cannot run two Cash ISAs side by side.

What is the difference between a Cash ISA and a regular savings account?

The main difference is tax treatment. Interest on a regular savings account is taxable income; interest on a Cash ISA is tax-free. Both are equally safe if held with a regulated bank, and both are covered by the Financial Services Compensation Scheme up to £85,000.

Can I withdraw money from my ISA whenever I want?

Yes, unless you have a fixed-rate ISA. With a variable-rate Cash ISA, you can withdraw money at any time without penalty. With a fixed-rate ISA, you cannot access the money until the fixed term ends, or you will lose some or all of the interest. Check the terms of your specific account.

What happens to my ISA if I die?

Your ISA becomes part of your estate and is handled according to your will or the rules of intestacy. The tax-free status ends when you die, so any interest earned after your death is taxable to your estate. Your executors or next of kin should contact the bank to discuss what happens next.