ISA allowance
Maximise your savings with an ISA: A tax-free way to grow your money
An Individual Savings Account (ISA) is one of the most powerful tools for saving and investing tax-efficiently in the UK.
Whether you're looking to build a nest egg, invest for the future, or save for a first home, ISAs allow you to grow your money without paying tax on interest, dividends, or capital gains.
In this guide, we'll break down everything you need to know about ISAs, including the different types, annual contribution limits, and strategies to maximise your tax-free savings.
Why use an ISA?
Tax-free growth:
No income tax, dividend tax, or capital gains tax on ISA savings.
Flexible saving & investing:
Choose from Cash ISAs, Stocks & Shares ISAs, Lifetime ISAs, and more.
Government bonus:
25% bonus, up to £1,000 per year with a Lifetime ISA.
Separate Junior ISA allowance:
Can save up to £9,000 per year tax-free on behalf of children.
Things to consider
ISA allowance limit:
You can contribute a maximum of £20,000 per year.
Lifetime ISA restrictions:
Early withdrawals (before 60 or not for a first home) incur a 25% penalty.
Investment risk:
Stocks & Shares ISAs are subject to market fluctuations.
Cash ISA returns:
Interest rates may be lower than inflation, reducing real returns.
1. What is an ISA?
An Individual Savings Account (ISA) is a government-backed, tax-free savings and investment account.
Unlike regular savings accounts, ISAs allow your money to grow without being taxed—meaning you keep more of what you earn.
Whether you're saving for a house deposit, retirement, or just want a safe place for your money, an ISA is an essential tool for tax-efficient financial planning.
2. Types of ISAs
There are several types of ISAs to suit different financial goals:
- Cash ISA: A low-risk option where you don't pay tax on the interest earned. It's ideal for those looking for guaranteed returns without exposure to market risks.
- Stocks & Shares ISA: Invest in shares, bonds, or funds with potential for higher returns. While offering greater growth prospects, this ISA comes with higher risk as the value of investments can go down as well as up.
- Lifetime ISA (LISA): Designed to help save for a first home or retirement, with the added benefit of a government bonus of up to £1,000 per year. Restrictions apply on when funds can be withdrawn without penalty.
- Innovative Finance ISA: Earn interest from peer-to-peer lending platforms. This ISA allows you to lend money to individuals or businesses, offering potentially higher returns but with higher risk compared to a Cash ISA.
- Junior ISA (JISA): Tax-free savings account for children under 18. The account must be opened by a parent or guardian, but anyone can contribute to it. Since contributions are for a child under 18, rather than deposited in your own name, the Junior ISA allowance is separate to your own allowance.
3. ISA contribution limits
The annual ISA allowance for the 2023/24 tax year is £20,000. This is the maximum you can contribute across all ISA types, excluding the Junior ISA, which has a separate allowance.
You can split your £20,000 allowance across different types of ISAs, however the maximum you can put into a Lifetime ISA each year is £4,000.
Summary:
- Total annual ISA allowance (2023/24): £20,000.
- Lifetime ISA (LISA) limit: £4,000 (part of the £20,000 total allowance).
- Junior ISA allowance: £9,000 per child (separate from the £20,000 ISA allowance).
Junior ISAs:
In addition to the £20,000 annual ISA allowance, contributions can also be made to a Junior ISA.
The Junior ISA is a tax-free savings account for children under 18, with a separate annual contribution limit of £9,000 for the 2023/24 tax year, which is independent of the adult ISA limit. The funds become accessible to the child when they turn 18.
The Junior ISA allowance applies per child. For example, if someone wanted to contribute to three Junior ISAs (one for each child), they could put in up to £9,000 for each account. This allows a total of £27,000 across the three accounts in a single tax year.
Additional Permitted Subscription (APS):
The APS allows you to continue benefiting from tax-free savings on inherited funds.
If your spouse or civil partner passes away, you may be eligible for an APS, which is an extra ISA allowance on top of your own £20,000 annual limit. This additional allowance equals the value of the deceased partner's ISA at the time of their death.
4. ISA allowance calculator
To help you explore how to effectively use your ISA allowance across various ISA wrappers, we've built a simple-to-use calculator.
5. How to maximise your ISA
Maximising your ISA contributions ensures you take full advantage of tax-free savings and investment growth. Here are some key strategies to get the most out of your ISA:
- Contribute early: Depositing funds at the start of the tax year maximises potential returns through compounding.
- Use multiple ISA types: Combining a Cash ISA for security and a Stocks & Shares ISA for growth can balance risk and reward.
- Take advantage of government bonuses: The Lifetime ISA (LISA) offers an extra 25% bonus per year on contributions up to £4,000.
- Use your full allowance: The £20,000 annual limit does not roll over. Unused allowances are lost at the end of the tax year.
Want to plan your ISA contributions more effectively? Try our ISA Allowance Calculator below to explore different saving strategies:
6. Common ISA mistakes to avoid
While ISAs offer great tax-free benefits, many people make mistakes that can reduce their effectiveness. Here are some common pitfalls and how to avoid them.
- Not using your full allowance: ISA allowances don't roll over. If you don't use it, you lose it, meaning missed tax-free savings opportunities.
- Withdrawing and reinvesting in the same tax year: Standard ISAs don't allow reinvestment once funds are withdrawn. If you withdraw and deposit again, it counts towards your annual limit.
- Exceeding the contribution limit: Depositing more than £20,000 in a single tax year will result in the excess funds being ineligible for tax-free benefits.
- Choosing the wrong ISA type: Cash ISAs are low risk but may not keep up with inflation, while Stocks & Shares ISAs carry higher risk but greater potential for long-term growth.
- Ignoring fees in Stocks & Shares ISAs: Platform and fund fees can eat into your returns over time. Always check management fees before investing.
7. ISA transfer rules explained
If you're unhappy with your current ISA provider, you can transfer your savings without losing tax benefits. Here's how:
- You can transfer between ISAs: Move funds from a Cash ISA to a Stocks & Shares ISA (or vice versa).
- Don't withdraw to transfer: If you withdraw funds manually and reinvest, they lose ISA status.
- Partial transfers allowed: You can move just part of your ISA from previous tax years.
- Lifetime ISA transfers: You can transfer a Lifetime ISA to another Lifetime ISA, but not into a standard ISA.
- Fees may apply: Some providers charge transfer fees, so check before moving your funds.