Individual Savings Accounts (ISAs) are one of the most popular ways for UK residents to save and invest tax-free. However, many people have questions about how ISAs work, their tax benefits, and the different types available. This guide answers the most common ISA-related queries to help you make informed financial decisions
An ISA is a tax-efficient savings or investment account that allows UK residents to earn interest, dividends, and capital gains tax-free. Each tax year, you can contribute up to £20,000 across your ISAs.
There are four main types of ISAs:
Cash ISA – A savings account with tax-free interest.
Stocks & Shares ISA – Invest in stocks, bonds, and funds without paying tax on returns.
Lifetime ISA (LISA) – Designed for first-time homebuyers or retirement savings, offering a 25% government bonus.
Innovative Finance ISA (IFISA) – Includes peer-to-peer lending and other alternative investments.
Each type serves a different financial goal, so choosing the right one depends on your needs.
The ISA allowance for the 2025/26 tax year is £20,000. You can split this across multiple ISAs, but you cannot pay into more than one of the same type in a single tax year.
Cash ISAs – You can withdraw funds anytime, but some fixed-rate ISAs may have penalties.
Stocks & Shares ISAs – You can sell investments and withdraw cash, but market fluctuations may affect returns.
Lifetime ISAs – Withdrawals for non-home purchases or retirement before age 60 incur a 25% penalty.
Innovative Finance ISAs – Withdrawal rules depend on the investment terms.
Some ISAs are flexible, meaning you can withdraw and replace funds within the same tax year without affecting your allowance
Yes! You can transfer ISAs between providers to get better interest rates or investment options. However:
Cash ISA to Cash ISA – Allowed anytime.
Stocks & Shares ISA to Cash ISA – Allowed, but selling investments may impact returns.
Lifetime ISA Transfers – Can be moved, but penalties apply if not used for home buying or retirement.
Always check for fees or restrictions before transferring
If you move outside the UK, you cannot contribute to an ISA, but your existing funds will continue to grow tax-free
Yes! A Junior ISA allows parents to save up to £9,000 per year tax-free for children under 18. The funds are locked until the child turns 18, at which point they gain full control.
Your ISA can be inherited by your spouse or civil partner, maintaining its tax-free status. If inherited by someone else, it becomes part of your estate for inheritance tax purposes
ISAs offer tax-free growth, making them more efficient than regular savings accounts.
Regular savings accounts may offer higher interest rates but are subject to tax.
ISAs are ideal for long-term savings, while regular accounts provide easier access to funds.
Yes, you can have multiple ISAs, but you can only pay into one of each type per tax year. For example, you can contribute to one Cash ISA and one Stocks & Shares ISA, but not two Cash ISAs in the same tax year.
If you accidentally contribute more than £20,000 in a tax year, your provider may return the excess funds. If not, HMRC may require you to withdraw the excess amount and pay tax on any interest or investment gains.
Yes! ISAs and pensions serve different purposes. While pensions offer tax relief on contributions, ISAs provide tax-free withdrawals. Many people use ISAs alongside pensions for flexible retirement savings.
A Flexible ISA allows you to withdraw and replace funds within the same tax year without affecting your annual allowance. Not all providers offer this feature, so check before withdrawing funds.
Yes! While pensions are the primary retirement savings tool, Stocks & Shares ISAs and Lifetime ISAs can supplement retirement funds. The Lifetime ISA even offers a 25% government bonus for retirement savings.
The Help to Buy ISA was designed for first-time homebuyers but is now closed to new applicants. The Lifetime ISA (LISA) replaced it, offering a 25% government bonus on savings for home purchases or retirement.
Yes! You can transfer between different ISA types, such as moving a Cash ISA to a Stocks & Shares ISA. However, transferring a Lifetime ISA to another type may result in a withdrawal penalty.
Unused ISA allowances do not roll over to the next tax year. If you don’t use your £20,000 limit, you lose the opportunity to save or invest tax-free for that year.
Yes! ISAs are available to everyone, including self-employed individuals. Since self-employed workers don’t receive employer pension contributions, ISAs can be a great way to build tax-free savings.
ISA funds are protected under the Financial Services Compensation Scheme (FSCS), covering up to £85,000 per provider. If your provider fails, your savings remain secure within this limit.
You cannot open an ISA for another adult, but you can open a Junior ISA for a child under 18. Parents or guardians manage the account until the child reaches adulthood.
Final Thoughts
ISAs are a powerful tool for tax-free savings and investments. Whether you’re saving for a home, retirement, or general financial security, choosing the right ISA can make a significant difference in your financial future
