What is an ISA?

An Individual Savings Account (ISA) is simply a wrapper which protects any savings or investments held within it from taxation. This means that any interest earned on savings or income, or capital gains made on investments held within the ISA, is tax-free and does not need to be included on a tax return.

ISA choices

Broadly speaking, if you are a UK resident, there are currently five different ISAs to choose from:

• Cash ISAs (available to those aged 18 or over).

• Stocks and shares ISAs (available to those aged 18 or over).

• Innovative finance ISAs (available to those aged 18 or over).

• Junior ISAs – Cash and Stocks and Shares options (available to those aged under 18)

• Lifetime ISAs (available to those aged 18 or over and under 40).

You can split your allowance between multiple accounts each year, including cash and investment options, and multiple ISAs of the same type, as long as you don’t exceed your annual allowance.

Use it or lose it

The ISA allowance is currently £20,000 per annum for adult ISAs and £9,000 for Junior ISAs. NB the maximum that can be paid into a Lifetime ISA is £4,000 per annum.

You get a new allowance at the start of each new tax year, starting on 6th April, which means that over time you could build a substantial tax-efficient savings fund.

However, any unused allowance is lost at the end of the tax year and cannot be carried over into the next, so it is a "use it or lose it" scenario.

Sheltering your returns from tax

The major appeal of an ISA is that any interest earned, or profits made, are free from UK income tax and capital gains tax (CGT).

This provides a valuable tax break for investors, particularly those whose capital gains may exceed the annual CGT allowance (currently £3,000 per annum).

Moreover, you won’t pay tax on dividends from shares held in an ISA. Outside an ISA, any dividend income above the annual tax-free threshold of £500 is liable to tax; with basic-rate taxpayers paying 8.75%, higher-rate taxpayers paying 33.75%, and additional-rate taxpayers paying 39.35%.

Interest earned on cash savings held within an ISA are also tax free, irrespective of your tax rate. Outside of an ISA the personal savings allowance (PSA) is limited to £1,000 for basic rate taxpayers, £500 for higher rate taxpayers, and zero for additional-rate taxpayers.

Getting started

You do not need to invest the full amount into an ISA - most providers will let you start saving with a small lump sum or regular payment.

ISAs are usually very flexible, with many allowing you to withdraw and replace cash in the same tax year without affecting your annual allowance. Not all ISA providers offer this feature, so it is best to check any restrictions with your provider before you start.

You also have the freedom to transfer your ISA to another provider, whether you’re after a better cash ISA rate or are looking to invest.

Stocks and Shares ISAs

Regular investment into an ISA will enable you to build significant tax-free funds overtime, and there is no limit to the amount of growth that you can make within an ISA. However, as with any investment if you choose a stocks and shares ISA the value of your investments can fall and rise, and you may get back less than you initially invested.

A stocks and shares ISA should be considered a long-term investment for five or more years and may not be suitable for short term investors.

Junior ISAs

In addition to your own personal ISA allowance, you can invest up to £9,000 in a Junior ISA (JISA) for a child. Both cash and stocks and shares options are available.

A JISA must be opened by a parent or legal guardian, but anyone (including parents, grandparents, friends, or relatives) can contribute up to the annual limit.

JISAs offer a highly tax-efficient way of establishing savings for your children. Be aware though that when your child reaches the age of 16, they can take control of the account, and they can withdraw the money when they turn 18.

Ready to get started?

ISAs are a great tax efficient way of saving and offer a range of options to suit most needs.

The full array of ISAs on offer can be overwhelming and there are multiple factors to consider ensuring that you pick the right one for you.

If you would like to discuss ISAs, or any aspect of financial advice with one of our Wealth Planners, please email hello@successionwealth.co.uk or call us on 0800 051 4659 and we will arrange for someone in your area to contact you.

Please note: This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The content was accurate at the time of writing, changes in circumstances, regulation and legislation after the time of publication may impact on the accuracy of the article.

This information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change and tax implications will be based on your individual circumstances.

The value of your investment(s) and the income derived from it, can go down as well as up and you may not get back the full amount you invested.

FP2025-183 - Last reviewed April 2025