What an ISA is and why it matters
An Individual Savings Account is a wrapper that sits around your savings or investments and shields them from tax. Inside an ISA your interest, dividends and gains are all free of income tax and Capital Gains Tax. That is the key point. It is not a product in itself but a tax status that can apply to cash, shares, funds and certain other holdings.
The advantage grows over time. Outside an ISA, interest can be taxed once it passes your personal savings allowance, dividends are taxed above a small allowance, and gains on investments can attract Capital Gains Tax. Inside an ISA none of that applies, and there is nothing to report to HMRC. For savers and investors who use their allowance year after year, the saving can become significant.
Because the benefit is purely about tax, ISAs fit naturally into a wider plan. Our guide to tax planning shows how the ISA allowance works alongside pensions and other reliefs across a tax year.
The £20,000 allowance and the main types
You can pay up to £20,000 into ISAs in the 2026/27 tax year. This is your total allowance across all the ISAs you hold, not a separate limit for each one. The allowance runs from 6 April to 5 April and cannot be carried forward, so anything you do not use by the end of the tax year is lost.
There are several types of ISA. A cash ISA works like a savings account with the interest free of tax. A stocks and shares ISA holds investments, with any dividends and gains sheltered from tax. A Lifetime ISA lets you pay in up to £4,000 within your overall allowance and adds a government bonus, with rules about when the money can be used. A Junior ISA is for children and has its own separate limit.
You can usually split your allowance across more than one type in the same year, as long as the total stays within £20,000. The right mix depends on your goals and your attitude to risk, which is where regulated financial advice comes in.
A worked example
Moving savings out of a taxed account
Tom is a higher rate taxpayer with £40,000 sitting in an ordinary savings account paying 4 percent, which produces £1,600 of interest a year. His personal savings allowance as a higher rate taxpayer is only £500, so £1,100 of that interest is taxed at 40 percent, costing him £440 in tax each year. Tom moves £20,000 into a cash ISA this tax year and plans to move a further £20,000 next year. The interest earned inside the ISA is completely free of tax. Once both amounts are sheltered, the interest no longer counts towards his personal savings allowance and the £440 yearly tax charge disappears.
The exact saving depends on the interest rate and your tax band, but the principle holds. Sheltering income producing savings inside an ISA removes them from the tax calculation entirely. Spreading the move across two tax years lets Tom use a fresh £20,000 allowance each year.
How ISAs compare with ordinary accounts
The clearest way to see the value is to compare like with like. In an ordinary account, interest above your personal savings allowance is taxed at your normal rate, dividends above the £500 dividend allowance are taxed at 8.75, 33.75 or 39.35 percent depending on your band, and gains can face Capital Gains Tax. Inside an ISA, all of that falls away.
There is also a reporting benefit. ISA income and gains do not go on your tax return at all, which keeps your Self Assessment simpler and reduces the risk of mistakes. For investors with growing portfolios, keeping holdings inside an ISA can save a great deal of administration as well as tax.
None of this tells you what to hold inside the wrapper. The choice between cash and investments, and which investments, is a regulated financial advice question. Our role is to make sure the tax position is handled correctly. When you are ready, you can start your quote.
Common mistakes
The most common mistake is simply not using the allowance. Because it cannot be carried forward, every tax year that passes without using it is a permanent loss of tax free room. Leaving the contribution to the very end of the tax year also risks missing the deadline.
Another error is leaving large cash balances in ordinary accounts while the ISA allowance goes unused, then paying tax on interest that could have been sheltered. People also sometimes forget that the £20,000 is a combined limit across all ISAs, not a limit for each one, which can lead to paying in too much.
Finally, some people assume ISA income still needs to be declared. It does not. Income and gains inside an ISA are free of tax and stay off your tax return completely.
What you should do
Check how much of your £20,000 allowance you have used this tax year and whether you have spare cash that is currently being taxed in an ordinary account. If you do, moving it into an ISA before the year end can stop that tax arising.
If you hold investments outside an ISA, consider whether they could sit inside one to remove future dividend and Capital Gains Tax. Keep track of your total contributions so you stay within the combined limit, and remember the allowance resets every 6 April.
We can review your overall tax position and make sure your savings and investments are arranged in the most tax efficient way, while leaving the investment choices to a regulated financial adviser. To get started, start your quote.
A practical guide to how ISAs work in 2026/27, covering the £20,000 allowance, the main types and the tax advantages they offer.
Frequently asked questions
How much can I put in an ISA in 2026/27?
You can pay up to £20,000 into ISAs in the 2026/27 tax year. This is a combined limit across all the ISAs you hold, not a separate allowance for each. It runs from 6 April to 5 April and cannot be carried forward, so any unused amount is lost at the end of the tax year.
Do I have to declare ISA income on my tax return?
No. Interest, dividends and gains earned inside an ISA are free of income tax and Capital Gains Tax, and they do not need to be reported to HMRC. This keeps your tax return simpler and removes the risk of mistakes on sheltered income.
What types of ISA are there?
The main types are the cash ISA, which works like a tax free savings account, and the stocks and shares ISA, which holds investments. A Lifetime ISA allows up to £4,000 within your overall allowance and adds a government bonus, and a Junior ISA is for children with its own separate limit.
Can I split my allowance across different ISAs?
Yes, you can usually pay into more than one type of ISA in the same tax year, provided the total stays within your £20,000 allowance. For example you could put some in a cash ISA and some in a stocks and shares ISA in the same year.
Is an ISA better than an ordinary savings account?
From a pure tax point of view an ISA is more efficient, because interest, dividends and gains inside it are free of tax, while an ordinary account can attract tax once you pass your allowances. Whether to choose cash or investments inside the ISA is a separate question for a regulated financial adviser.