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 offered by UK banks where you do not pay income tax on the interest your money earns. With a regular savings account, the interest is taxable income. With an ISA, it is not — the interest stays yours to keep.

This tax advantage is the defining feature. You can save up to a set limit each tax year (April to April in the UK), and all the interest you earn within that limit is tax-free. The account itself works like any other savings account: you deposit money, it sits there earning interest, and you can withdraw it when you need it.

ISAs exist because the UK government wanted to encourage people to save. By removing the tax on interest, they make saving more attractive, especially for people on modest incomes who might otherwise lose a chunk of their interest to tax.

Key Takeaways

  • Interest earned in an ISA is not subject to income tax, unlike interest from regular savings accounts.
  • You can save up to £20,000 per tax year across all your ISAs combined, though you can only pay into one Cash ISA per year.
  • ISAs are offered by most UK banks and building societies, and the account works like a standard savings account otherwise.
  • You must be a UK resident and at least 16 years old (or 18 for some types) to open an ISA.

The annual savings limit and how it works

The ISA allowance is £20,000 per tax year. This is your total limit across all ISAs you hold — you cannot split £20,000 between multiple Cash ISAs at different banks. However, you can hold a Cash ISA at one bank and a Stocks and Shares ISA at another, and the £20,000 covers both combined.

The tax year runs from 6 April to 5 April the following year. Any money you save within that window counts toward your £20,000 limit. If you do not use your full allowance in one year, it does not roll over — you start fresh on 6 April with a new £20,000 to use.

If you save more than £20,000 in a tax year, the amount over the limit goes into the ISA but loses its tax protection. You will pay tax on interest earned on that excess amount. This is why it matters to track how much you have paid in, especially if you have multiple ISAs or move money between accounts.

Types of ISAs and what they hold

There are two main types: Cash ISAs and Stocks and Shares ISAs. A Cash ISA works like a regular savings account — your money sits in the account earning interest. A Stocks and Shares ISA holds investments like shares, bonds, or funds instead of cash.

Most people new to saving use a Cash ISA because it is straightforward: you deposit money and earn interest, just like a normal account, but the interest is tax-free. You can only pay into one Cash ISA per tax year, though you can hold multiple Cash ISAs opened in previous years.

There are also Innovative Finance ISAs (which hold peer-to-peer loans) and Lifetime ISAs (designed for first-time home buyers or retirement savings), but these are less common and have different rules. For most people starting out, a Cash ISA is the right choice.

Who can open an ISA and what you need

You must be a UK resident to open an ISA. You also need to be at least 16 years old for a Cash ISA, though some banks allow younger teenagers to open them with parental consent. Stocks and Shares ISAs require you to be 18.

To open an ISA, you will need proof of identity (a passport or driving licence) and proof of address (a recent utility bill or bank statement). You will also need to confirm your tax residency status. The bank will ask these questions during the process process.

If you have moved to the UK from abroad, you may still be able to open an ISA, but you must be classed as a UK resident for tax purposes. If you are unsure, ask the bank — they will tell you whether you meet the residency requirement.

How ISA interest rates compare to regular savings accounts

ISA interest rates vary by bank and by account type, just like regular savings accounts. Some ISAs offer higher rates than others, and rates change over time. The advantage of an ISA is not a higher interest rate — it is that you keep all the interest you earn instead of paying tax on it.

Whether an ISA saves you money depends on how much tax you would normally pay on savings interest. If you earn very little interest (under £1,000 per year), you may not owe tax anyway because of your personal savings allowance. But if you earn more, or if you are a higher-rate taxpayer, an ISA protects that interest from tax.

When comparing ISAs, look at the interest rate offered, not just the tax benefit. A Cash ISA paying 3% is better than one paying 2%, even though both are tax-free. Shop around — rates differ significantly between banks.

Moving money between ISAs and closing an account

You can move money from one ISA to another, and the money keeps its tax-free status. This is called a transfer. You do not withdraw the money and re-deposit it — you ask the new bank to transfer it directly from the old one. This way, the money stays protected and does not count as a new deposit against your annual limit.

If you withdraw money from an ISA and then put it back in the same year, it counts as a new deposit and uses up part of your £20,000 allowance. To avoid this, use a transfer instead of a withdrawal.

If you close an ISA, the account ends and you lose the tax protection on any new interest earned. Any interest earned while the account was open remains tax-free. You can open a new ISA with a different bank whenever you like, as long as you stay within your annual limit.

Frequently Asked Questions

Do I pay tax on ISA interest?

No. Interest earned in an ISA is not subject to income tax. This is the main benefit of the account. You keep all the interest your money earns.

Can I have more than one ISA?

You can hold multiple ISAs, but you can only pay new money into one Cash ISA per tax year. You can hold Cash ISAs opened in previous years and also hold a Stocks and Shares ISA at the same time. Your total savings across all ISAs cannot exceed £20,000 per tax year.

What happens if I save more than £20,000 in an ISA in one year?

The amount over £20,000 stays in the account but loses its tax protection. You will pay income tax on interest earned on that excess amount. It is important to track your deposits to stay within the limit.

Can I withdraw money from an ISA whenever I want?

Yes, like a regular savings account, you can withdraw money from a Cash ISA whenever you need it. Some accounts may have notice periods or withdrawal limits, so check your account terms. The money you withdraw can be re-saved in a new ISA in a future tax year.

Is an ISA better than a regular savings account?

An ISA is better if you earn enough interest that you would normally pay tax on it. If you earn very little interest, you may not owe tax anyway. Compare the interest rates offered by ISAs and regular accounts — the rate matters more than the tax status if the difference is large.