What you need to know about ISAs and how they’ll soon change

The idea behind individual savings accounts (ISA) is pretty simple. Any money you pay in will be protected from tax as it grows and when you take it out.

That means there’s no tax to pay on savings interest if you’ve got a cash ISA. And, with stocks & shares ISAs, you won’t pay any tax on dividends or capital gains.

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But while the concept of tax-free saving itself might be straightforward, continual tinkering with the rules, means you won’t be alone if you’re somewhat baffled by ISAs.

So, with some key reforms coming down the track, we answer everything you wanted to know about ISAs, both now and from the next tax year.

I can save £20,000 into ISAs, right?

Spot on. The ISA allowance is now £20,000 a year for individuals and it’s being frozen at that level until 2031.

You can split that money across the various types of ISAs however you like. The key is that you don’t pay in more than £20,000 in total, over the course of the tax year (which runs 6 April to 5 April).

Just note that from April 2027, the amount that you’ll be able to pay into cash ISAs will be capped at £12,000, if you’re under 65.

It’s also worth bearing in mind that married couples (and civil partners) can team up to shelter £40,000 a year from tax, between them.

You can’t open joint ISAs, but if you’re happy to tactically divvy up assets between you, there could be further opportunities to save tax.

If you have children, they can also pay £9,000 a year into Junior ISAs.

That means a family of four can shelter £58,000 a year between them.

If you don’t lose your allowance, you’ll lose it. That’s why it’s a good idea to pay in as much as you can, before the tax year ends on 5 April.

What’s the best type of ISA for me?

Cash and stocks and shares are the most popular types of ISA and they’re available on both adult and junior accounts.

Cash ISAs are just like savings accounts with tax protection. And they’re a sensible choice for emergency savings funds and known future expenses like holidays or home moves. But, for longer-term savings (say five to 10 years plus), you will likely get better returns with stocks and shares accounts.

Analysis from Moneyfacts found that over the last 12 months, the average stocks and shares ISA fund grew by 11.22% compared to 3.48% in the average cash ISA.

Similarly the long-running Barclays Equity Gilt study has shown that over the last 130 years, there’s a 91% chance shares will trump cash over any 10- year window.

Another option is an innovative finance ISA (IFISA) which lets you pay into peer-to-peer loans through platforms that match lenders with borrowers in need of funds. However, they’ve not proved popular and there’s only a limited number of providers.

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What about Lifetime ISAs?

If you’re under 40, you can open a Lifetime ISA to help you save for your first home or retirement. You can pay in up to £4,000 each year (which counts towards your overall £20,000 allowance) and the government pays a 25% bonus.

However, in the latest Budget the government confirmed plans to phase out the Lifetime ISA and replace it with a new ISA just for first-time buyers. In late June, the government launched a consultation on the new policy, and we can expect more detail soon – watch this space.

How many ISAs can I have?

There used to be rules limiting the number of ISAs you can open and pay into each year. Prior to April 2024, you could only pay into one of each type of ISA. That rule has now been scrapped and HMRC will allow you to pay into as many cash, stocks and shares or innovative finance ISAs as you like (although individual providers may have restrictions, so check first).

You can only pay into one Lifetime ISA each tax year. For Junior ISAs, children can pay into one cash and one stocks and shares account each year.

What if I change my mind about my ISAs – can I switch?

Absolutely. If you’ve got a cash ISA earning miserly interest, you can move into one paying a better rate. Or, if you discover that you could pay lower charges or get better customer service with another stocks and shares ISA provider, there’s nothing to stop you switching.

Alternatively, if you want to work your money harder, you can also switch out of cash and into stocks and shares.

At the moment it’s also possible to transfer out of a stocks and shares ISA and into cash, but that particular switch will be banned for under-65s from April 2027 as part of wider changes to cash ISAs.

However you plan to move your ISAs, make sure you follow the official ISA transfer process.

If you simply take your money out of one ISA and move it into another, you’ll lose its tax-free status and it will eat into your current ISA allowance. 

Instead you should request your new provider handles the transfer when you open the account (they will normally have a form to complete).

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Is it possible to transfer other investments into my stocks and shares ISA?

It’s easy to open or top up a stocks and shares ISA with cash. But you can also transfer other investments you might have into an ISA to shelter them from tax.

For example, if you have purchased shares in your employer’s company through the Save as You Earn (SAYE) scheme, you can transfer those into your stocks and shares ISA.

Or, if you have other holdings in a trading or general investment account, you can move them into an ISA using the Bed & ISA process.

This allows you to sell the shares in your trading account and immediately rebuy them within your ISA ,and you’ll only pay a trading fee on the purchase not the sale.

You just need to be mindful of capital gains tax (CGT). If the shares you sell cause you to breach the £3,000 annual allowance for gains, you could trigger a CGT bill. However, you can often mitigate that by transferring investments gradually, over several tax years.

You’ll also need to make sure you have enough ISA allowance remaining and that your trading account and ISA are on the same platform.

Do I pay tax on interest on cash within a stocks and shares ISA?

At the moment, interest earned on cash held within stocks and shares ISA is tax free, but that will change from 6 April 2027, when a 22% charge will be applied.

The government is introducing this rule to deter savers from circumventing the lower cash ISA limit and using their full £20,000 allowance to save in cash or cash-like assets.

Returns on cash-like investments, defined exclusively as money market funds, will be exempt from the charge, provided they don’t comprise 100% of your portfolio.

Can I use an ISA instead of a pension?

ISAs are more flexible than pensions, as your savings won’t be tied up until you’re 55 (57 from 2028).

But, for most people, it’s more cost-effective to save for retirement with a pension because you get the benefit of tax relief on your contributions which, over the years, gives your savings a massive boost.

You can also potentially pay more money into pensions (100% of your earnings, up to £60,000) than you can into ISAs.

That said, if you’ve got the funds available, there’s a strong argument for using ISAs to save for retirement alongside pensions, providing a handy blend of tax efficiency, accessibility and flexibility.

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As withdrawals from ISAs are tax free (unlike pensions where only your first 25% is paid tax-free), they can provide a helpful way of topping up your retirement income, without increasing your tax bill.

What happens to my ISA when I die?

Nobody can inherit your actual ISA accounts when you die. Instead, the accounts will be closed and the money paid into your estate and distributed according to the instructions you leave in your will. This means that inheritance tax could be payable on the money, depending on the total value of your estate.

However, if you’re married (or in a civil partnership), your spouse can get an additional permitted subscription (APS): this gives them a one- off boost to their annual ISA allowance, that is equivalent to the value of your ISA. 

So, if you had £50,000 in your ISA when you died, your spouse would be able to pay a total of £70,000 into their ISA for one year only. This is possible, regardless of whether your spouse inherited your ISA assets.