ISA: The UK's £20,000-a-Year Tax-Free Wrapper, Explained
An Individual Savings Account (ISA) is a tax wrapper, not an investment: whatever you hold inside it — cash, funds, shares, bonds — grows free of income tax and capital gains tax, and withdrawals are tax-free too. Every UK resident aged 18 or over can put up to £20,000 into ISAs each tax year (6 April to 5 April).
There are four adult types and one allowance shared between them. A cash ISA is a savings account with no tax on the interest; a stocks and shares ISA holds funds, ETFs, shares and bonds; a Lifetime ISA adds a 25% government bonus for a first home or retirement, capped at £4,000 of the £20,000; and an innovative finance ISA holds peer-to-peer loans. You can open one of each type per year, and since April 2024 you can split the allowance across several providers of the same type.
The allowance is use-it-or-lose-it: unused room does not carry forward, and the £20,000 has been frozen since 2017. The Autumn Budget 2025 announced that from April 2027 only £12,000 of the £20,000 can go into cash ISAs for anyone under 65, with the rest reserved for stocks and shares — a deliberate push toward investing. Check the current rule before deciding your split each April.
The tax saving depends on what the ISA holds. Cash interest outside an ISA is covered by the personal savings allowance (£1,000 for basic-rate taxpayers, £500 for higher-rate, nothing for additional-rate), so a small cash pot may not need the wrapper. Dividends and capital gains are where an ISA earns its keep: the dividend allowance is only £500 and the capital gains allowance £3,000, so an invested ISA of any size avoids tax that a general investment account would owe.
Withdrawals are tax-free and, in a flexible ISA, can be replaced within the same tax year without using fresh allowance — but not every provider offers flexibility, and Lifetime ISAs charge 25% on withdrawals outside the permitted reasons. Transfers between providers must go through the ISA transfer process; withdrawing and re-depositing counts as a new subscription and burns allowance.
ISAs pass to a spouse or civil partner with their tax status intact through an additional permitted subscription, but they are not outside the estate for inheritance tax the way a pension is. For most people the order of priority is: employer pension match first, then Lifetime ISA if buying a first home, then stocks and shares ISA for long-term money, then cash ISA for near-term savings above the personal savings allowance.
Richify tracks every ISA against the £20,000 allowance across providers and types, shows the dividends and gains it is sheltering, and flags the cash ISA split change before April 2027 arrives.
