ISA tax savings

An ISA is often described as a 'tax wrapper' because it protects the returns on savings and investments from tax, up to an annual limit (known as your ISA allowance).

Types of ISA

There are two types of ISA:

  • Cash ISAs work like traditional savings accounts, except that interest earned isn't subject to Income Tax.
  • Stocks and Shares ISA (sometimes called investment ISAs) protect your investments from tax. You can invest in individual shares, funds, government bonds, corporate bonds and investment trusts through a Stocks and Shares ISA.

Interest earned on money held in a Cash ISA is not subject to UK Income Tax.

With a Stocks and Shares ISA, there is no Capital Gains Tax to pay on profits made from share price increases (capital gains), or on interest earned on bonds. You will still have to pay the 10% dividend tax on dividends, but this is a flat-rate that applies whatever income tax-band you fall into.

Investing means exposing your money to a level of investment risk, to get started read our guide to investing for beginners.

Your annual ISA allowance

Each tax year, a limit is set on how much you can put in an ISA (the ISA allowance). For the 2016/17 tax year, which runs from April to April, the allowance is £15,240.

You can put up to the allowance in any combination of Cash and Stocks and Shares ISAs. You're only allowed to open one Cash and one Stocks and Shares ISA in a tax year – but you're usually free to move your money between the two, as long as your ISA providers allow.

Each year you’ll get a new ISA allowance. As long as you don’t withdraw your money from an ISA, when a new tax year starts you won’t lose the tax benefits on the previous years’ allowance.

Transferring to get a better deal

You can transfer your ISA from one provider to another, but you must transfer it through the provider. If you make withdrawals, that portion of your ISA allowance is gone and you won't be able to use it again under next year.

As with most financial products, you can shop around to get the right ISA for you. For Cash ISAs, compare interest rates and transfer rules to find the right account for you. For Stocks and Shares ISAs, compare the range of investments on offer, fees and charges, and transfer rules. Read more about investment choices.

Last updated: 06 April 2016