A complete guide to ISAs
For UK investors, few acronyms carry as much weight as “ISA.” The Individual Savings Account remains the bedrock of personal financial planning in Britain, a tax-efficient sanctuary for your wealth amid ever-increasing taxes.
As we move into the new tax year, the importance of maximising this allowance has never been greater.
Whether you are saving for a deposit on a first home, building a retirement nest egg, or simply sheltering cash from the taxman, the ISA is your first port of call.
At its core, an ISA is a “tax wrapper,” a protective shell that shields your money from income tax and capital gains tax. In the current tax year, investors can save up to £20,000 in a stocks and shares or cash ISA. This means you can deposit up to this amount across one or multiple ISAs, provided you do not exceed the total cap.
Recent rule changes have added flexibility, now allowing you to open and pay into multiple ISAs of the same type in a single tax year, removing the rigid “one of each” restriction that previously limited savers.
However, the rules around ISAs are set to change.
In November, the government announced that from April 2027, the cash ISA allowance will fall to just £12,000 for savers under the age of 65. The government also announced a consultation early next year to replace the Lifetime ISA (LISA) with an ISA product to support first time buyers.
This means it’s more important than ever to maximise the allowances on offer today. What’s more, the annual ISA allowance is a use-it-or-lose-it allowance.
That means if you don’t make the most of your annual £20,000 allowance, it’s gone forever and cannot be rolled over.
Cash ISAs
Cash ISAs function in the same way as standard savings accounts but with one crucial difference: the interest you earn is entirely tax-free.
In a high-interest-rate environment, this is invaluable. For a higher-rate taxpayer, earning 4.5 per cent interest in a standard account would result in a significant tax bite once the Personal Savings Allowance is breached.
In a Cash ISA, you keep every penny.
There are generally two main flavours of Cash ISAs:
- Easy Access: These offer flexibility, allowing you to withdraw money whenever you need it. They are ideal for emergency funds.
- Fixed Rate: These lock your money away for a set period (usually 1–5 years) in exchange for a higher interest rate.
Competition is fierce in this market, meaning there are some fantastic deals on offer, but savers need to act quickly to take advantage of the offers as they can be pulled quickly and without notice.
Stocks and Shares ISAs
While Cash ISAs protect capital, Stocks and Shares ISAs are designed to grow it.
Historical data suggests that over decade-long periods, equities tend to outperform cash, though the value of investments can go down as well as up.
These accounts allow you to buy shares in specific companies (like Apple or BP) or, more commonly, invest in collective funds that spread your risk across hundreds of companies.
There are plenty of providers on the market that offer different products, and choosing the best can seem like a minefield. The best way to start is to decide what you want from your provider. Do you want a platform like Vanguard that offers a simple self-managed account with limited fund options, but some of the lowest costs on the market?
Or do you need something more, such as the offers from J.P. Morgan Personal Investing and MoneyBox, which charge a bit more for a managed product that helps you make the best investment decisions.
It’s also worth thinking about fees. Most providers charge fees as a percentage of assets. Interactive Investor (ii), on the other hand, charges a fixed monthly subscription (£4.99–£11.99), which can be best suited for investors with larger portfolios (typically over £50,000), as the costs don’t scale with your wealth.
Specialist ISAs
Beyond the “big two,” there are specialist ISAs designed for specific life stages.
Lifetime ISA (LISA)
The hero for first-time buyers. You can contribute up to £4,000 of your £20,000 allowance into a LISA. The state adds a 25 per cent bonus (up to £1,000 free cash annually).
However, the funds must be used for a first home (up to a value of £450,000) or accessed after the age of 60. Withdraw it for any other reason, and you face a hefty 25 per cent penalty.
Junior ISA (JISA)
For parents planning ahead, the JISA allows you to save £9,000 per year per child (2025/26 limit).
This sits outside your personal £20,000 allowance. The money is locked away until the child turns 18, at which point it legally belongs to them.
Fidelity, Hargreaves Lansdown and AJ Bell are among JISA providers who offer a wide range of fund choices and no service fees on junior accounts.
Innovative Finance ISA (IFISA)
IFISAs allow you to lend money via Peer-to-Peer (P2P) lending platforms. Returns can seem appealing, but capital is not usually FSCS-protected.
If the borrower defaults, you could lose your money. This is generally suitable only for experienced investors comfortable with higher risk.