An ISA lets you earn interest on savings without paying income tax on that interest

An ISA (Individual Savings Account) is a savings account where the interest you earn is not subject to income tax. In a regular savings account, you owe tax on the interest — the money the bank pays you for letting them hold your money. With an ISA, that interest stays yours entirely. The bank still pays you the same rate, but you keep all of it instead of sending part to HM Revenue and Customs.

This matters most if you have a larger balance or if you are in a higher tax bracket. Someone with £50,000 in savings earning 4% interest makes £2,000 per year. In a regular account, a basic-rate taxpayer would owe tax on that £2,000. In an ISA, they would not. Over time, that difference compounds — the untaxed interest earns interest of its own.

ISAs are offered by banks, building societies, and some investment platforms. You can open one at most of the same places you would open a regular savings account. The process is straightforward: you prove your identity, confirm you are a UK resident, and choose how much to deposit.

Key Takeaways

  • Interest earned in an ISA is not subject to income tax, so you keep all the interest the bank pays you.
  • You can deposit up to £20,000 per tax year across all your ISAs combined, whether they are savings ISAs, stocks and shares ISAs, or other types.
  • Once money is in an ISA, it stays tax-free for as long as it sits there — the tax protection does not expire.
  • You can hold only one cash ISA per tax year, but you can move money between ISAs if you switch providers.
  • ISAs are most valuable if you earn enough interest that you would normally owe tax on it, or if you want to shield investment growth from tax.

The annual deposit limit and how it works across account types

You can put up to £20,000 into ISAs in each tax year (6 April to 5 April). This is a combined limit across all ISAs you hold. If you put £12,000 into a cash ISA, you have £8,000 left to use in a stocks and shares ISA, a lifetime ISA, or an innovative finance ISA in that same year.

The limit resets on 6 April each year. Money you deposit in one tax year does not count against the next year's limit. If you deposit £20,000 by 5 April and another £20,000 on 6 April, both amounts are within the rules — the second deposit is in the new tax year.

You can hold multiple ISAs at once, but there is one restriction: you can have only one cash ISA per tax year. You can hold a cash ISA and a stocks and shares ISA and a lifetime ISA all at the same time, but you cannot hold two cash ISAs simultaneously. If you want to switch to a different cash ISA provider, you must close the first one or transfer the balance to the new provider.

How the tax protection works and what it covers

The tax protection is automatic. You do not need to do anything special or file paperwork. The bank knows it is an ISA, so it does not report the interest to HM Revenue and Customs, and you do not declare it on a tax return. The interest is straightforward not taxed.

The protection covers interest only — the money the bank pays you for the balance you hold. It does not cover any other income. If you hold a stocks and shares ISA and receive dividends from shares, those dividends are also tax-free within the ISA. Capital gains (profit when you sell an investment for more than you paid) are also tax-free. But the protection applies only to money inside the ISA. Interest you earn in a regular savings account is still taxable.

The tax-free status continues indefinitely. Once money is in an ISA, it stays protected from tax as long as it remains in that ISA. You can leave it there for decades and never pay tax on the interest, even if you stop making new deposits.

Cash ISAs versus stocks and shares ISAs

A cash ISA works like a regular savings account — you deposit money, the bank holds it, and you earn interest. The only difference is the tax treatment. Cash ISAs typically offer interest rates similar to regular savings accounts at the same bank. You can withdraw money whenever you need it, and there is no risk to your capital (the amount you deposited).

A stocks and shares ISA lets you invest the money in shares, bonds, funds, or other investments. The value can go up or down depending on market performance. You keep any profit tax-free, but you can also lose money. Stocks and shares ISAs are for people comfortable with investment risk and who plan to hold the money for longer periods.

A lifetime ISA is designed for saving toward a first home or retirement. You can deposit up to £4,000 per year, and the government adds a 25% bonus (up to £1,000 per year). The money must stay in the account until you are 60, or you withdraw it to buy your first home, or you face a penalty. This is a specialist product and not the right choice for money you might need sooner.

Most people starting out with ISAs choose a cash ISA because it is straightforward and safe. You can always move money to a stocks and shares ISA later if you want to invest.

Opening an ISA and what you need to provide

To open an ISA, you will need to prove your identity and confirm you are a UK resident. Most banks ask for a passport or driving licence and a recent utility bill or bank statement showing your address. Some providers let you do this online with a video call; others ask you to visit a branch or post documents.

You will also need to declare that you are not holding another cash ISA with a different provider in the same tax year. The bank will ask you directly — you are not required to contact your other bank or provide proof. If you are moving money from an existing ISA, the new provider can handle the transfer for you, which is simpler than closing the old account and withdrawing the money yourself.

Once the account is open, you can deposit money by bank transfer, standing order, or in some cases by cheque or cash at a branch. There is no minimum deposit at most providers, though some ask for £1 or £100 to start.

When an ISA makes sense and when it does not

An ISA is worth opening if you have savings that earn enough interest to trigger a tax bill. A basic-rate taxpayer can earn up to £1,000 in savings interest per year without owing tax (the personal savings allowance). A higher-rate taxpayer can earn up to £500 without owing tax. If your interest will exceed those amounts, an ISA saves you money.

An ISA is also useful if you want to shield investment growth from tax, even if you are not currently in a tax-paying situation. The protection is there if your circumstances change, and it costs nothing to use.

An ISA is less important if you have small savings that earn little interest, or if you are not a UK resident for tax purposes. Non-residents cannot hold ISAs. If you are unsure about your tax residency status — for example, if you have recently moved to the UK or are planning to leave — check with HM Revenue and Customs before opening an account.

Moving money between ISAs and closing accounts

You can move money from one ISA to another without losing the tax protection. The process is called a transfer, and it is different from withdrawing and redepositing. When you transfer, the money moves directly from the old provider to the new one, and it does not count as a new deposit against your annual limit.

To transfer, contact the new provider and ask them to arrange it. They will handle the paperwork and contact your old bank. The old bank cannot refuse a transfer, though it may take a few weeks to complete. Do not withdraw the money yourself and then deposit it elsewhere — that counts as a withdrawal and a new deposit, and it uses up part of your annual allowance.

If you want to close an ISA entirely, you can withdraw the money at any time. There are no penalties or notice periods. The money is yours, and you can do what you want with it. If you close a cash ISA and want to open a different cash ISA in the same tax year, you can do so — closing one frees up the slot.

Frequently Asked Questions

Do I pay tax on ISA interest?

No. Interest earned in an ISA is not subject to income tax. You keep all of it. This is the main feature of an ISA — it is a tax-free savings wrapper.

Can I have more than one ISA?

You can hold multiple ISAs at once, but only one cash ISA per tax year. You can hold a cash ISA, a stocks and shares ISA, and a lifetime ISA all simultaneously, as long as your total deposits do not exceed £20,000 per year.

What happens to my ISA if I move abroad?

You cannot open a new ISA if you are not a UK resident. If you already have an ISA and move abroad, the account stays open and the tax protection continues, but you cannot make new deposits. Check with HM Revenue and Customs about your tax obligations in your new country.

Is my money safe in an ISA?

Cash ISAs are protected by the Financial Services Compensation Scheme (FSCS) up to £85,000 per person per bank. Stocks and shares ISAs are not covered by FSCS, but your investments are held in your name and are separate from the provider's assets. The risk depends on what you invest in, not on the ISA wrapper itself.

Can I withdraw money from an ISA whenever I want?

Yes, from a cash ISA. You can withdraw at any time with no penalty. Stocks and shares ISAs also allow withdrawals, but the value depends on market conditions — you might get less than you put in. Lifetime ISAs have restrictions: withdrawals before age 60 (except for first-home purchase) trigger a 25% penalty.