Understanding ISAs: Your Tax-Free Savings Wrapper
Individual Savings Accounts (ISAs) are the UK government's way of encouraging people to save and invest. All growth and income within an ISA is completely tax-free - no income tax on interest, no capital gains tax on profits, and no tax on dividends. For the 2025-26 tax year, you can save up to £20,000 across all your ISA accounts combined.
Cash ISA vs Stocks & Shares ISA
A Cash ISA works like a savings account with tax-free interest. Rates currently range from 3% to 5%, making them ideal for short-term savings or emergency funds. A Stocks & Shares ISA lets you invest in funds, shares, and bonds. While riskier in the short term, historically equities have returned around 7% annually over the long term. Over 10+ year periods, a Stocks & Shares ISA will typically outperform cash significantly due to compounding.
The Lifetime ISA (LISA)
Available to those aged 18-39, the Lifetime ISA offers a 25% government bonus on contributions up to £4,000 per year - that's up to £1,000 free each year. The money can be used towards your first home (up to £450,000) or accessed from age 60. Withdrawing for any other reason incurs a 25% penalty on the withdrawal amount, which actually results in a net loss.
Frequently Asked Questions
Can I have multiple ISAs?â–¾
Yes, from April 2024 you can pay into multiple ISAs of the same type in a single tax year. However, your total contributions across all ISAs must not exceed £20,000. You can have a Cash ISA, Stocks & Shares ISA, Lifetime ISA, and Innovative Finance ISA simultaneously.
What happens to my ISA if I die?â–¾
Your ISA will form part of your estate for inheritance tax purposes, but your spouse or civil partner gets an Additional Permitted Subscription (APS) equal to the value of your ISA at the date of death. This effectively lets them "inherit" your ISA allowance on top of their own.
Should I max out my ISA or contribute to a pension?â–¾
Pensions offer tax relief on contributions (effectively free money from the government), but you can't access them until age 57. ISAs are more flexible - you can withdraw any time without penalty. A good strategy is to contribute enough to your pension to get full employer matching, then max out your ISA, then add more to your pension if you have surplus.
Calclypso Editorial Team
ISA allowances and rates verified for 2025-26 tax year. Last updated: April 2026. This calculator is for estimation purposes. Actual investment returns will vary.