What an ISA is
In brief: ISAs are tax-free wrappers for your savings and investments. You can contribute up to £20,000 per year, and everything inside — growth, dividends, withdrawals — is completely free of UK tax.
An Individual Savings Account (ISA) is a tax-advantaged wrapper for savings and investments. Money inside an ISA grows completely free of income tax, Capital Gains Tax, and dividend tax. When you withdraw, there is no further tax to pay.
The key constraint is the annual ISA allowance: you can contribute up to £20,000 per person per tax year across all your ISAs combined. Once money is inside an ISA, it remains tax-sheltered indefinitely — even if the account grows to a large sum over many years.
Unlike pensions, ISAs have no minimum access age. You can deposit and withdraw freely at any point in your life.
Stocks & Shares ISA
A Stocks & Shares ISA lets you hold equities, bonds, funds, ETFs, and investment trusts inside the tax-free wrapper. Capital growth and dividend income are both completely tax-free.
Stocks & Shares ISAs are widely used as a long-term savings vehicle alongside pensions, particularly for people who have exhausted their pension annual allowance or who want accessible tax-free savings without pension age restrictions.
Cash ISA
A Cash ISA holds cash deposits earning interest. The interest is entirely tax-free. Cash ISAs are suitable for short-term savings or emergency funds, though real returns over long periods tend to be lower than investment-based alternatives.
From April 2027, the government has announced that savers under the age of 65 will be limited to £12,000 per year in Cash ISAs (within the overall £20,000 ISA allowance). Savers aged 65 and over would retain the full £20,000 Cash ISA limit. This change was announced in the Autumn Budget 2025 and is subject to the Finance Bill completing its passage through Parliament.
Lifetime ISA (LISA)
The Lifetime ISA offers a 25% government bonus on contributions up to £4,000 per year — a maximum annual bonus of £1,000. The LISA allowance is included within the overall £20,000 annual ISA allowance.
The bonus makes LISAs attractive for long-term saving, but there are significant restrictions on withdrawal:
- Withdrawals are penalty-free only for a first-time property purchase or after age 60.
- Any other withdrawal incurs a 25% penalty, which claws back the government bonus and a small additional amount.
For retirement purposes, a LISA can be powerful if you are confident the funds will remain untouched until age 60. The restrictions make it much less flexible than a standard ISA or pension for people who may need earlier access.
The annual allowance
The £20,000 annual allowance applies across all ISA types combined. Contributions to a Lifetime ISA count within this limit.
The allowance is frozen at £20,000 until at least 2030. Unused allowance from one tax year cannot be carried forward to the next — it is lost if not used.
ISA withdrawals
Withdrawals from ISAs are completely tax-free. There is no income tax on ISA withdrawals, unlike pension income. This makes ISAs particularly valuable as a source of tax-free retirement income, especially in years when other taxable income is high.
Flexible ISAs (a feature offered by some providers) allow you to withdraw money and replace it in the same tax year without losing the annual allowance.
Bed & ISA: migrating existing investments
If you hold investments in a GIA, the Bed & ISA technique allows you to gradually move them into the tax-free ISA wrapper. You sell the GIA investments (potentially within your annual CGT allowance of £3,000) and then use the proceeds to purchase the same investments inside an ISA.
Over time, this reduces the proportion of your portfolio sitting in a taxable wrapper. It is particularly valuable for people with significant GIA holdings built up before they maximised ISA contributions.
Bed & ISA is an opt-in feature in retirement projection tools, typically disabled by default.
How ISAs are modelled in projections
Retirement projections typically model the ISA as a single tax-free wrapper. Contributions are tracked against the annual allowance, and all withdrawals are treated as tax-free income. The projection may not distinguish between Cash ISA and Stocks & Shares ISA sub-types.
These projections are for modelling purposes only. They do not constitute financial advice. Tax rules are subject to change. Please consult a qualified financial adviser before making financial decisions.