What is an ISA?

What does ISA actually mean?

ISA stands for individual savings account. The name is a bit misleading, because an ISA is not one specific kind of account. It is a tax-free wrapper that a bank, building society or investment platform puts around your money. What goes inside the wrapper, cash or investments, decides which of the ISA types you are actually using, but the tax treatment is the same underlying idea across all of them.

What does tax-free actually mean inside an ISA?

Ordinarily, interest on savings, dividends from shares, and gains when you sell an investment at a profit can all be taxed. Inside an ISA, none of that applies. You do not pay Income Tax on interest, Dividend Tax on dividends, or Capital Gains Tax on growth, on anything held inside the wrapper, regardless of how much interest, income or growth it produces. Outside an ISA, most people still have some tax-free room too, such as the Personal Savings Allowance on interest, but an ISA removes the need to track any of that for the money inside it. Tax treatment depends on your circumstances and may change.

The four types of ISA

• Cash ISA: works like a savings account. You deposit money and earn interest, tax-free. The amount you put in is not at risk from market movements, though inflation can still erode what it is worth over time.
• Stocks and Shares ISA: holds investments such as funds, shares, and bonds. The value can rise or fall, and you could get back less than you put in, but any growth, dividends or interest earned inside it stay tax-free.
• Innovative Finance ISA: holds peer-to-peer loans, crowdfunding debentures, certain funds that cannot sit inside a Stocks and Shares ISA because of their notice or redemption period, and cryptoasset exchange-traded notes. Less commonly used than the other three types.
• Lifetime ISA: for saving toward a first home or retirement, holding cash or investments depending on the provider. It has its own £4,000 annual limit, inside the overall £20,000, and the government adds a 25% bonus on top, up to £1,000 a year.

There is also a Junior ISA, for children under 18, with its own separate £9,000 annual limit that has nothing to do with an adult’s own allowance.

Who can open an ISA?

You must be 18 or over to open an adult ISA, including a Cash ISA; the minimum age for a Cash ISA was raised from 16 to 18 on 6 April 2024, in line with the other adult ISA types. A Lifetime ISA carries a further condition: you must open it before your 40th birthday, though you can keep contributing, and earning the bonus, up to age 50. A Junior ISA works the other way around: it is opened by a parent or guardian on behalf of a child under 18, and the child cannot withdraw the money until they turn 18, even though they can start managing the account themselves from age 16.

Is your money protected?

Two different protections apply, and it is worth knowing which one covers what. Cash held in a Cash ISA is protected by the Financial Services Compensation Scheme up to £120,000 per person, per authorised firm, the same protection that covers ordinary savings accounts. Investments held in a Stocks and Shares ISA are protected up to £85,000 per person, per firm, a separate and lower limit that did not change when the deposit limit rose in December 2025. Either way, FSCS protection covers the failure of the firm holding your money; it does not protect a Stocks and Shares ISA from losing value because the investments inside it fall.

How do you choose between types?

That depends on your own circumstances, how soon you might need the money, and how comfortable you are with the value moving up and down, so this page does not recommend one type over another. A Cash ISA suits money you want to keep secure and access without much notice. A Stocks and Shares ISA suits money you can leave invested for the longer term and are comfortable seeing fall in value as well as rise. Many people use both, alongside a Lifetime ISA if they are saving for a first home or retirement and meet the age rules.

Why bother with an ISA instead of an ordinary account?

Outside an ISA, interest on savings can be taxed once it goes over your Personal Savings Allowance: £1,000 a year for basic rate taxpayers, £500 for higher rate, and nothing at all for additional rate taxpayers. Sam, a basic rate taxpayer, has £30,000 in an ordinary savings account earning 4% interest, £1,200 a year. That is £200 over his £1,000 allowance, so he pays Income Tax on that £200. Held inside a Cash ISA instead, the same £1,200 of interest would be entirely tax-free, whatever else he earns. From 6 April 2027, savings interest tax rates are rising by 2 percentage points across the board, which makes that tax-free treatment worth slightly more than it is today.

What’s changing from 2027

From 6 April 2027, the overall £20,000 ISA allowance stays the same, but anyone 64 or under at the end of the tax year can put at most £12,000 of it into a Cash ISA, with the rest going into a Stocks and Shares ISA, an Innovative Finance ISA, or a Lifetime ISA if they want to use the full amount. Anyone 65 or over at the end of the relevant tax year keeps the full £20,000 available for cash. See the Cash ISA limit from 2027 for the full detail, and the ISA allowance for how the £20,000 splits across types today.