ISA
An Individual Savings Account — a tax-free savings or investment wrapper that lets you earn interest, dividends, and capital gains without paying UK tax on them. The annual ISA allowance is £20,000, which can be split across Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs, and Lifetime ISAs. Unlike pensions, ISA withdrawals are also entirely tax-free.
How it works
You can spread your £20,000 annual ISA allowance across the different ISA types in any combination you like within a tax year, as long as your total contributions across all of them don't exceed the overall limit — for example, £10,000 into a Cash ISA and £10,000 into a Stocks and Shares ISA in the same year. Money must be paid in as new contributions during the tax year the allowance applies to; unused allowance doesn't carry forward to the following year.
Because growth inside an ISA is entirely free of Dividend Tax and Capital Gains Tax, ISAs are usually the first place to hold investments that would otherwise generate a regular tax bill, before using up other allowances like the Dividend Allowance or Annual Exempt Amount on assets held outside a wrapper. Transferring money between ISA providers doesn't use up any of your annual allowance, provided you use the proper ISA transfer process rather than withdrawing and re-depositing the cash yourself.
A Lifetime ISA sits within the overall £20,000 allowance rather than on top of it, and comes with its own separate contribution limit and withdrawal restrictions aimed at first-time house purchases and retirement saving. Withdrawing cash and paying it back in later in the same tax year only counts against your allowance again if the ISA isn't a 'flexible' ISA — most modern easy-access Cash ISAs are flexible, but it's worth checking your provider's terms.
Example: Tax-free growth inside an ISA
Suppose you invest the full £20,000 ISA allowance in a Stocks and Shares ISA, and it grows to £24,000 within the tax year — a £4,000 gain, plus any dividends received along the way.
Inside the ISA, that £4,000 gain and any dividends are entirely free of both Capital Gains Tax and Dividend Tax. Outside an ISA, that same £4,000 gain would count towards your Annual Exempt Amount of £3,000, with the remaining £1,000 potentially taxable.
Frequently asked questions
What happens to my ISA allowance if I don't use it all?
It's lost — the ISA allowance doesn't carry forward, so any unused portion of the £20,000 annual limit simply disappears once the tax year ends.
Can I have more than one ISA at the same time?
Yes — you can hold multiple ISAs of different types, and under current rules multiple ISAs of the same type, as long as your total new contributions across all of them stay within the annual allowance.
Do I pay tax when I withdraw money from an ISA?
No — withdrawals from an ISA are entirely tax-free, unlike pensions where withdrawals above your tax-free lump sum are taxed as income.
Related Terms
Tax-Free Savings
Savings held in tax-advantaged wrappers such as ISAs, where interest, dividends, and capital gains accumulate without being subject to UK tax.
Dividend Allowance
The amount of dividend income you can receive each tax year completely free of tax, currently set at £500.
Capital Gains Tax
A tax on the profit (gain) you make when you sell or dispose of an asset that has increased in value, such as shares, investment property, or business assets.