Savings and Pensions

What Is ISA (Individual Savings Account)?

A tax-free savings or investment wrapper; contributions up to £20,000 per year grow free of income tax and capital gains tax.

Definition

An Individual Savings Account (ISA) lets you save or invest up to £20,000 per tax year completely free of UK income tax and capital gains tax. Withdrawals are also tax-free. The main types are: Cash ISA (like a savings account, interest tax-free), Stocks and Shares ISA (invest in funds, shares, bonds), Lifetime ISA (save up to £4,000/year with 25% government bonus, for first home or retirement), and Innovative Finance ISA (peer-to-peer lending). You can split your £20,000 allowance across types within a year. Unused allowance cannot be carried forward. ISAs are the cornerstone of UK tax-efficient saving and are protected from income tax regardless of how large the pot grows.

Formula

Future value = Annual contribution x ((1 + rate)^years - 1) / rate

Example

Contributing £10,000 per year to a Stocks and Shares ISA at 7% annual return for 20 years grows to approximately £430,000, all tax-free.

Use It

Try the ISA Calculator

Related Terms

SIPP (Self-Invested Personal Pension)A flexible pension wrapper that lets you choose your own investments; contributions attract tax relief at your marginal rate.National Insurance (NI)Compulsory UK government contributions paid by employees and employers that fund state pension, NHS, and welfare benefits.PAYE (Pay As You Earn)HMRC's system for collecting income tax and National Insurance directly from employee pay before it reaches the worker.
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