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When you hear about individual savings accounts (ISAs), you might hear that they’re ‘tax free’ or ‘tax efficient’. But what does this mean? Just how tax efficient are ISAs? And are there any circumstances where you might have to pay tax on an ISA? Here we take a look at ISAs and tax to clear things up.
What is an ISA?
An ISA is a tax-efficient way to save or invest your money. There are several different types of ISAs, each designed to hold different things. The ISA wrapper works slightly depending on the type of ISA.
Cash ISAs
Are very similar to savings accounts offered by most banks and building societies. However, with cash ISAs you don’t pay tax on the interest you earn.
Stocks and shares ISAs
Can hold shares in companies and other investments, such as bonds (loans to governments and companies), often through funds. If your investments grow in value, you don’t pay tax on that growth.
Junior ISAs
Are savings or investing accounts for children. A parent or legal guardian can open one for a child under 18. Both cash and stocks and shares junior ISAs are available, and every child can have one of each.
Lifetime ISAs
Let you invest or save up to £4,000 a year towards your first home or for retirement. You must be aged 18 to 39 to open one, but you can pay in to it until you’re 50. A government bonus tops up your contributions by 25% (up to £1,000 a year). You can’t access the money until you buy your first home or turn 60. Cash lifetime ISAs and stocks and shares lifetime ISAs are available – you can have one of each.
Innovative finance ISAs
Involve investing in peer-to-peer lending. This loans the money in your ISA to people and companies looking to borrow. The aim is to make money when the borrowers repay the loans with interest.
How are ISAs taxed?
Let’s go into more detail about ISAs, tax-efficient saving and the ISA tax rules. Remember, tax treatment depends on your individual circumstances and is subject to change
How much you can put into an ISA tax free?
The tax year runs from 6 April one year to 5 April the next year. Every tax year, there’s a cap on how much you can put into an ISA – this is called your ISA allowance.
For 2025/26, the ISA allowance is £20,000. You can put this in one type of ISA or spread it across multiple types of ISAs.
Lifetime ISAs have their own maximum allowance: £4,000 in the 2025/26 tax year. You can spread this across a cash lifetime ISA and a stocks and shares lifetime ISA.
Junior ISAs also have a separate allowance – £9,000 for each child in the 2025/26 tax year. You can split this between a cash junior ISA and a stocks and shares junior ISA.
Any money an adult puts into a junior ISA is completely separate from their own ISA allowance. So, in 2025/26, adults can put up to £20,000 in all ISAs open in their name, plus a maximum of £9,000 for each child with a junior ISA.
Do you pay tax on an ISA? Our expert Sarah Pennells explains
View transcript
Hi Sarah. We're going to be talking about ISAs and tax. Why is that?
Well, ISAs are a tax efficient way of saving or investing your money, but it's a tax efficiency bit that some people find confusing. Now put simply, with an ISA, you don't have to pay tax on any return you generate, and there's no tax to pay when you take money out or cash it in.
Sarah, let's go back to basics. What exactly is an ISA?
There are several different kinds of ISAs, but the most popular are cash ISAs and stocks and shares ISAs. Now with a cash ISA, it works like an ordinary savings account, except you don't pay any tax on interest and you don't pay tax when you take money out of your cash ISA.
Stocks and shares ISA works in a similar way, but your money is invested instead. So you don't have to pay tax on any return, and you don't pay tax when you take money out.
Now around two-thirds of people who have an ISA have a cash ISA, and about 3 in 10 of people who have an ISA have a stocks and shares ISA. But ISAs aren't a new idea, and in fact they've been around for over 25 years.
OK. And how are ISA's tax efficient?
I think it's worth explaining the tax efficiency of ISAs with a couple of examples. If you have a cash ISA, then it is like an ordinary savings account, but you don't have to pay tax on the interest. So it doesn't matter how much money you have in your cash ISA or how much interest you receive, there's no tax to pay. And you don't have to pay tax when you take money out of your cash ISA either.
Now, the stocks and shares ISA, it's similar, but of course, your money is invested rather than being in savings account. But again, there's no tax to pay on the return that your stocks and shares ISA generates. And you don't have to pay tax when you take money out or cash it in.
And on that return, Sarah, can you spell out how exactly you get your return from stocks and shares ISA?
There are different ways that you can get a return through your stocks and shares ISA.
Now, the first is from growth. So your stocks and shares ISA will be invested in a fund, and that fund will buy shares in a range of different companies. So, if the share price rises, that will generate growth. But secondly, some companies give a share of their profits to their investors. That's something that they might do once a year or several times a year. And that's another way that your stocks and shares ISA can create a return.
But you don't pay tax on a return, no matter how it's generated.
Great. Thank you for answering all my questions today about ISA Sarah.
Do you pay tax when you put money in an ISA?
No, there’s no tax to pay when you put money into an ISA as, if you pay income tax, you will have already paid tax on this money. In 2025/26, you can put up to £20,000 into all ISAs open in your name.
Do you pay tax on interest or growth in an ISA?
For cash ISAs, there’s no income tax on interest you earn. It doesn’t count as part of your personal allowance for income or your personal savings allowance specifically for savings interest.
For stocks and shares ISAs, you typically invest in funds. Funds pool your money with other investors’ money to buy things (assets) like shares in companies.
Growth can come from the assets increasing in value. The companies the fund holds shares in might also pay dividends. These are payments a company might make to owners of its shares if it makes a profit.
As this investment growth happens inside an ISA, you don’t have to pay tax on it. Of course, investment returns aren’t guaranteed. The value of investments can go down as well as up, so you may get back less than you pay in.
Do you pay tax when you withdraw money from an ISA?
You can withdraw money from your ISA without worrying about paying income or capital gains tax, so you keep the interest you’ve earned or any growth you’ve achieved.
Frequently asked questions
Here are a few common questions people ask about ISAs and tax.
How is my ISA taxed when I die?
While you’re alive, there’s no tax to pay on:
- money you take out of an ISA
- growth your money achieves while it’s in the ISA.
However, when you die your ISA becomes part of your estate (the total value of everything you own on the date you die) for inheritance tax purposes. That means your estate may have to pay inheritance tax on your ISA if your estate is worth more than a certain amount.
If your spouse or civil partner died on or after 6 April 2018, you can inherit their ISA allowance. On top of your own ISA allowance that tax year, you can add a tax-free amount up to either the value of:
- the amount in their ISA when they died
- the amount in their ISA when it’s closed.
Do I have to pay tax when I transfer my ISA?
No, you don’t pay tax when you ask a new ISA provider to transfer your existing ISA directly into that new account.
But if you do want to transfer an ISA, it’s best to ask your provider to handle the transfer to make sure your money is protected.
If you were to take money out of your ISA, pay it into your bank account and then try and transfer it into another ISA, it could lose the tax benefits. This is particularly important if you have more than the current year’s ISA allowance saved or invested in your existing ISAs.
Your money is only protected from tax while it’s in in an ISA. Taking it out of the ISA, even for a short time, means you lose that protection.
What are the tax rules if I have more than one ISA?
With most ISAs, you can have as many types of ISAs with as many different providers as you like.
The exception is lifetime ISAs and junior ISAs. For these ISAs, you can have only one cash lifetime ISA and one stocks and shares lifetime ISA open at a time. But for all other types of ISA, as long as you don’t go over your ISA allowance in a tax year, it doesn’t matter how many ISAs you have open.
However, for ISAs that involve investing (stocks and shares ISAs and innovative finance ISAs), consider if having multiple ISAs of the same type makes sense. You usually pay charges on investment ISAs, which can eat away at your money if you pay them multiple times on multiple ISAs. Merging ISAs of the same type could help with this and make your investments easier to manage.
Do I lose my ISA tax benefits if I move outside the UK?
You must live in the UK to open an ISA. (There are exceptions for people and their spouses who live outside the UK because they’re in the armed forces or in diplomatic service).
If you open an ISA while you’re in the UK then move abroad, your ISA keeps its tax benefits. However, you can’t pay more money in after you move.
Can I open an ISA if I don’t pay tax?
Yes, you can open an ISA even if you don’t earn enough to pay tax.
Find out more
To find out more about ISAs, take a look at our dedicated ISA guides.
Royal London can’t give tax advice. For more information about how an ISA could affect your individual tax position, consider finding a financial adviser.