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

ISA stands for Individual Savings Account. It is a type of savings account available to UK residents where the interest and growth you earn stays yours — the government does not take tax on it. In a regular savings account, you pay income tax on interest above a small threshold. In an ISA, you do not pay tax on any of the interest, no matter how much it grows.

The trade-off is that ISAs come with rules about how much you can save each year and what types of accounts you can hold at the same time. These rules exist to prevent people from using ISAs to avoid tax on very large amounts of money. For most people saving modest amounts, an ISA straightforward means more of your interest stays in your account.

Key Takeaways

  • Interest earned in an ISA is not subject to income tax, unlike interest in standard savings accounts above the personal savings allowance.
  • You can pay up to £20,000 into ISAs in the current tax year (April to April), but this limit covers all your ISAs combined, not per account.
  • There are four types of ISA — Cash ISA, Stocks and Shares ISA, Innovative Finance ISA, and Lifetime ISA — and you can hold one of each type in the same year.
  • You must be a UK resident and at least 18 years old to open a Cash ISA; some types have different age requirements.
  • Money in an ISA is still protected by the Financial Services Compensation Scheme if your bank fails, up to £85,000 per person per institution.

The four types of ISA and what each one holds

A Cash ISA works like a regular savings account — you deposit money and earn interest. The difference is that interest is tax-free. You can have only one Cash ISA open at a time, though you can switch to a different provider if you want.

A Stocks and Shares ISA lets you invest in stocks, bonds, funds, and other investments. Any growth, dividends, or capital gains are tax-free. This is riskier than a Cash ISA because the value can go down as well as up, but the potential returns are higher over longer periods.

An Innovative Finance ISA lets you lend money to businesses or individuals through peer-to-peer lending platforms, with interest earned tax-free. This is less common and carries higher risk because the borrower might not repay.

A Lifetime ISA is designed for people aged 18 to 40 who are saving to buy their first home or for retirement. The government adds a 25% bonus on money you save — up to £1,000 per year, meaning a maximum £250 bonus. You can withdraw money penalty-free only for a first home purchase or after age 60; early withdrawal for other reasons costs you the bonus plus a 1% penalty.

How the £20,000 annual limit works across multiple ISAs

The £20,000 limit is a combined total across all ISAs you hold in a tax year (6 April to 5 April). If you pay £10,000 into a Cash ISA and £10,000 into a Stocks and Shares ISA, you have used your full allowance. You cannot pay more into either account until the next tax year begins.

The limit resets on 6 April each year. Money that was in your ISA on 5 April carries forward — it does not count against next year's limit. Only new deposits count toward the annual allowance.

You can hold one of each type of ISA at the same time. So you could have a Cash ISA, a Stocks and Shares ISA, an Innovative Finance ISA, and a Lifetime ISA all open in the same year, as long as the total you pay into all of them does not exceed £20,000.

Who can open an ISA and what you need to provide

To open a Cash ISA, you must be a UK resident and at least 18 years old. Some providers also require you to have a UK address and a UK bank account, though not always the same bank.

When you open an ISA, the provider will ask for proof of identity (a passport or driving licence) and proof of address (a recent utility bill or council tax letter). They will also ask whether you hold an ISA with another provider, because you cannot have two Cash ISAs open at the same time. If you lie about this, you can be charged tax on the interest in the second account retroactively.

Stocks and Shares ISAs and Lifetime ISAs have different age requirements — you must be 18 for Stocks and Shares, and 18 to 40 to open a Lifetime ISA (though you can keep it after 40). Innovative Finance ISAs also require you to be 18.

How tax-free interest actually works in practice

When you earn interest in a regular savings account, your bank reports it to HM Revenue and Customs (HMRC). If your total interest for the year exceeds your Personal Savings Allowance — which is £1,000 for basic rate taxpayers, £500 for higher rate taxpayers, and £0 for additional rate taxpayers — you owe income tax on the amount above that threshold.

In an ISA, the bank does not report the interest to HMRC at all. You do not pay tax on it, and you do not have to declare it on a tax return. This is the entire point of the account: the interest is genuinely tax-free from the moment it is credited.

If you have both a regular savings account and an ISA, you still have to count interest from the regular account toward your Personal Savings Allowance. The ISA interest is separate and untaxed.

Protection if your bank fails

Money in an ISA is covered by the Financial Services Compensation Scheme (FSCS), the same protection that covers regular savings accounts. If your bank or building society fails, you are protected up to £85,000 per person per institution.

This means if you have £50,000 in a Cash ISA with Bank A and £50,000 in a Cash ISA with Bank B, both amounts are fully protected. If you have £100,000 in a Cash ISA with Bank A, only £85,000 is protected; the remaining £15,000 is not.

The FSCS protection applies to the money itself, not to the tax-free status. If a bank fails and you receive compensation, the interest you earned up to that point remains tax-free.

Moving money between ISAs and switching providers

You can move money from one Cash ISA to another without losing the tax-free status, as long as you use the formal transfer process. Contact your new provider and ask them to arrange a transfer from your old ISA. Do not withdraw the money and deposit it elsewhere — that counts as a new deposit and uses your annual allowance.

When you transfer, the money keeps its tax-free status. The interest earned in the old account remains untaxed, and interest earned in the new account is also untaxed. The transfer usually takes 10 to 30 working days.

You can also transfer a Stocks and Shares ISA or Innovative Finance ISA to a different provider. Lifetime ISAs have stricter rules — you can transfer only to another Lifetime ISA provider, and only if you have not already received the government bonus for that tax year.

Frequently Asked Questions

Can I have two Cash ISAs open at the same time?

No. You can hold only one Cash ISA at a time. If you want to switch to a different provider, you must transfer the money formally rather than withdraw and redeposit it. You can, however, hold one Cash ISA, one Stocks and Shares ISA, one Innovative Finance ISA, and one Lifetime ISA all at the same time.

What happens to my ISA if I move abroad?

You can keep your existing ISA and continue to earn tax-free interest. However, you cannot open a new ISA or pay more money into an existing one once you stop being a UK resident. The tax-free status of money already in the account is not affected.

Is the interest rate in an ISA lower than in a regular savings account?

Not necessarily. ISA rates vary by provider and account type, just like regular savings accounts. Some ISAs offer competitive rates; others offer lower rates. Compare the actual interest rate offered, not the account type, when choosing where to save.

Can I withdraw money from my ISA whenever I want?

Yes, from a Cash ISA or Stocks and Shares ISA you can withdraw money at any time, though some accounts have notice periods. Lifetime ISAs are different — withdrawing before age 60 for reasons other than a first home purchase costs you the government bonus plus a 1% penalty on the amount withdrawn.

Do I need to declare ISA interest on my tax return?

No. ISA interest is not reported to HMRC and does not need to be declared on a Self Assessment tax return. The tax-free status is automatic.