What is an ISA savings account?

And why should you save in a cash ISA? We explain why ISAs should still be part of your savings plans

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Since their introduction in 1999, ISAs have been a popular choice for savers over the years. Putting your money in an ISA means you know it’s protected from UK tax. Read on to learn more about why we think a cash ISA can be worth saving in.

Cash ISA

Acts like an everyday savings account, except you don’t pay tax on the interest you earn.

Stocks & Shares ISA

A tax-efficient way to invest in stocks and shares, bonds and funds.

Innovative Finance ISA

Tax-efficient peer-to-peer lending or investing in ‘crowdfunding’.


Lifetime ISA (LISA)

Allows you to save or invest up to £4,000 a year until you’re 50, towards your first home or for later life, and receive a 25% government bonus.

How many ISAs can I have?

Every tax year you can put money into one of each kind of ISA.

The tax year runs from 6 April to 5 April. At the end of the tax year, your ISAs will stay open and continue to earn interest. It’s important to remember: although you can have any number of ISAs open at one time, you can only pay into one of each type per year.

So if you already have a cash ISA open with one provider from a previous tax year, you can open a new cash ISA with a different provider. But you can only pay into one of those cash ISAs during the same tax year. 

How much can you put in an ISA?

There’s an annual limit on how much you can save in ISAs, known as an ISA allowance. For the current tax year, the annual ISA allowance is £20,000. 

This limit applies across all the different types of ISA you may hold, and you can split your allowance across these different types if you want to. Or, you can pay the full £20,000 into a single type of ISA. You can only pay £4,000 into a lifetime ISA in one tax year. 

For example: 

You can

Put £20,000 in a cash ISA with one provider.

But you can’t

Put £10,000 in a cash ISA with one provider and £10,000 in another provider’s cash ISA during the same tax year.

You can

Pay £5,000 into a cash ISA, £2,000 into a stocks & shares ISA, £4,000 in a LISA and £9,000 in an innovative finance ISA with the same provider, or with different providers.

But you can’t

Pay £2,000 into a stocks & shares ISA with one provider and £18,000 into another provider’s stocks & shares ISA during the same tax year.

Can you make withdrawals from an ISA?

You can usually take your money out of an ISA whenever you like.  But there are different rules around putting that money back in depending on the whether the ISA you hold is flexible or not.

If your ISA is a ‘flexible’ one, you can take money in and out without it reducing your annual allowance of £20,000 . So you could put in £10,000, withdraw £3,000 and then put £13,000 back in.

If your ISA is ‘not flexible’, any money you take out can’t be replaced within your annual ISA allowance. For example:

  • You save £15,000 in a cash ISA.
  • You withdraw £5,000, leaving your ISA balance at £10,000.
  • Now you can only add another £5,000 to your ISAs this tax year. 

This is because the annual ISA allowance applies to what you pay in, not what you save overall.

Tax implications for withdrawals

The interest on your savings is only exempt from tax while that money remains in an ISA. Once the money has been withdrawn from an ISA, any future interest you earn on that amount may be subject to tax.

What should I know about cash ISAs?

A cash ISA acts like an everyday savings account. The main difference between an ISA and any other type of savings account is that you don’t pay UK tax on interest while your savings are in an ISA.

This interest is protected from tax for as long as you keep it in an ISA. A good way to think about a cash ISA is that it works as a tax-free ‘wrapper’. That money is ‘wrapped’ away, and protected from being taxed.

It’s also ‘wrapped’ away from your Personal Savings Allowance. This means interest you earn in an ISA won’t count towards your annual Personal Savings Allowance because it’s already tax-free.

Find out more about the Personal Savings Allowance

When could a cash ISA be worthwhile?

Each tax year, you can use your annual ISA allowance to build a pot of savings that’s sheltered from tax. If you don’t use your annual ISA allowance then you lose it for that tax year – and with it you lose the opportunity to save that amount of money tax-free. 

The annual ISA allowance means the total amount you save and shelter from UK tax grows over time. Using the full allowance each year could help you protect substantial amounts from future tax. If you have savings in a normal savings account, at some point you may need to pay tax on the interest you earn. With an ISA, all the interest you earn, you keep – as long as your savings stay in an ISA.  

If you’d had maxed out your annual allowance in a cash ISA each year since 1999, you would now have a pot of more than £180,000 – plus interest – sheltered from tax.

Although the introduction of the Personal Savings Allowance in 2016 means that most UK savers won’t pay tax on their savings, the allowance you get depends on your tax bracket:

So if you’re a top-rate taxpayer, or have a bigger savings balance that means you may use up your Personal Savings Allowance, there are potentially tax advantages of holding savings in a cash ISA.

And it’s not just now you need to think about. Your salary may increase and push you into a higher tax bracket, meaning more (or all) of your savings held outside an ISA could be subject to tax. There’s also a chance the Personal Savings Allowance could change, and ISA allowances can also change from time to time.

ISAs could help you future-proof your savings

All this is set against the current backdrop of historically low interest rates. The Personal Savings Allowance may seem like a lot at the moment, but if rates start to rise again, savers may end up using more of their allowance.

For example, if you had £30,000 in savings now and rates went up over three years, each year you’d be earning more interest than the last. Unless you’d saved this money in an ISA, any interest you earn may be subject to tax.

By the end of year three, £222.87 of interest would be subject to tax if you’re a basic-rate tax payer, or £722.87 if you’re a higher-rate tax payer.

Saving that money in an ISA instead would protect your interest from tax – and keep it protected over the years you save it.

The content in this article is for information only and is not advice. All content in this article was accurate on the date of publication shown above.


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