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. The annual ISA allowance of £20,000 is the primary route for most individuals to shelter savings from tax. Some savings interest is also covered by the Personal Savings Allowance (£1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers).
How it works
The £20,000 annual ISA allowance can be split however you like across the different ISA types in a single tax year — for example, part in a Cash ISA and part in a Stocks and Shares ISA — but the combined total across all your ISAs cannot exceed the overall limit. Unused allowance doesn't carry forward; it simply resets to £20,000 at the start of each new tax year.
Outside an ISA, most savers are also covered by the Personal Savings Allowance, which lets basic-rate taxpayers earn £1,000 of interest tax-free and higher-rate taxpayers £500, on top of anything sheltered in an ISA. Additional-rate taxpayers don't get a Personal Savings Allowance at all, which is one reason high earners tend to prioritise using their full ISA allowance first.
Because ISA growth and withdrawals are entirely free of income tax, dividend tax, and Capital Gains Tax, an ISA is generally the most tax-efficient home for savings you might otherwise hold in a general investment account, where dividends above the Dividend Allowance and gains above the Annual Exempt Amount would be taxable.
Example: combining an ISA with the Personal Savings Allowance
A saver with £30,000 puts £20,000 into a Cash ISA, using their full annual allowance, and holds the remaining £10,000 in an ordinary savings account. Interest earned inside the ISA is entirely tax-free, however much it grows.
As a basic-rate taxpayer, the saver also has a £1,000 Personal Savings Allowance for the interest earned on the £10,000 held outside the ISA — so unless that interest exceeds £1,000 in the year, the whole amount stays tax-free too.
Frequently asked questions
Can I have both a Cash ISA and a Stocks and Shares ISA in the same year?
Yes — you can pay into multiple ISA types in the same tax year, as long as your combined contributions across all of them don't exceed the £20,000 annual allowance.
Does money inside an ISA count towards my Personal Savings Allowance?
No — interest earned inside an ISA is tax-free regardless of the Personal Savings Allowance and doesn't use up any of it; the Personal Savings Allowance only applies to interest from savings held outside a tax-free wrapper.
What happens to my ISA allowance if I don't use it all?
It's lost — the £20,000 allowance doesn't roll over to the next tax year, so any unused portion simply disappears once the tax year ends on 5 April.
Related Terms
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.
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.