An ISA, or individual savings account, is a tax-free wrapper for cash savings or investments. Interest, dividends and capital gains earned inside an ISA are free of UK tax, within an annual subscription limit set by the government.
In one line: An ISA shelters savings or investments from UK tax on interest, dividends and gains, up to a yearly contribution limit.
How an ISA works
ISAs are set in law and overseen by HMRC. The total amount that can be paid in across all ISA types is 20,000 GBP for the 2026-27 tax year (HMRC). The main types are cash, stocks and shares, innovative finance and the Lifetime ISA.
For example, an investor putting 20,000 GBP into a stocks and shares ISA that grows to 24,000 GBP pays no capital gains tax on the 4,000 GBP gain, whereas the same gain outside an ISA could be taxable.
The allowance resets each tax year and cannot be carried forward, so unused room is lost on 6 April.
ISA vs a pension
An ISA gives tax-free growth and tax-free withdrawals at any time, but contributions get no tax relief going in. A pension offers relief on the way in but taxes most income on the way out.
ISAs suit accessible, flexible saving, while pensions suit long-term retirement saving locked until the minimum age.
Primary source: GOV.UK: Individual Savings Accounts