An ISA is the UK's simplest tax shelter: everything inside it grows free of income tax and capital gains tax. Here is how the £20,000 allowance and the main ISA types work in 2025/26.
The ISA is the UK's most popular tax shelter for a reason: it is genuinely simple. Pay money in, up to a yearly limit, and everything it earns is free of income tax and capital gains tax, forever, with no forms to fill in. With ordinary savings rates high and tax-free allowances shrinking, understanding the ISA has rarely mattered more.
Think of an ISA as a protective box. Whatever you place inside, cash, shares, funds or bonds, grows without HMRC taking a cut. There is no income tax on the interest or dividends and no capital gains tax when you sell investments at a profit. You do not declare ISA income anywhere on a tax return.
The trade-off is the annual limit. In 2025/26 you can pay in a total of £20,000 across all your ISAs combined. The allowance refreshes each 6 April and any unused portion is lost; you cannot carry it into the next year.
You can split your £20,000 across these in any combination:
The £4,000 LISA limit counts towards your overall £20,000 allowance. A separate Junior ISA, with a £9,000 limit in 2025/26, lets parents save tax-free for under-18s.
James is a higher-rate taxpayer with £20,000 in a cash ISA earning 5% interest, and a separate £20,000 in an ordinary savings account also at 5%.
| Account | Interest earned | Tax due |
|---|---|---|
| Cash ISA (£20,000 at 5%) | £1,000 | £0 (tax-free) |
| Ordinary savings (£20,000 at 5%) | £1,000 | see below |
On the ordinary account, James gets a £500 Personal Savings Allowance (the higher-rate amount), so £500 is tax-free and the other £500 is taxed at 40%, costing him £200. The identical interest inside the ISA costs him nothing. Over years, that difference compounds significantly. Compare scenarios with the savings tax calculator.
Since April 2024 you can open and pay into multiple ISAs of the same type in one tax year, provided you do not exceed the £20,000 total. Flexible ISAs let you withdraw and replace money within the same tax year without it counting again towards your allowance, useful if you dip into savings temporarily. ISAs do not, however, escape inheritance tax: their value forms part of your estate on death, though a surviving spouse can inherit the ISA allowance via an "additional permitted subscription". And while gains inside an ISA are CGT-free, you cannot use ISA losses to offset gains made elsewhere.
An ISA is the rare piece of tax planning that needs no accountant and no paperwork: pay in within the limit, and HMRC simply never asks about it again.
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