What is an ISA?
A tax-efficient savings or investment account. Any interest, dividends, or capital gains within an ISA are completely free of UK income tax and capital gains tax — you don't even declare them on your tax return. The annual ISA allowance for 2025/26 is £20,000, split across different ISA types as you choose.
What types of ISA are there?
Cash ISA: savings account with tax-free interest — best for money you may need soon. Stocks & Shares ISA: allowance invested in markets — historically outperforms cash over 10+ years but carries investment risk — best for long-term goals. Lifetime ISA: for under-40s, save £4,000/year and get a 25% government bonus (£1,000/year max) for first home or retirement. Junior ISA: for children under 18, up to £9,000/year, separate from the adult allowance.
Cash ISA vs stocks and shares ISA
Money needed within 3–5 years: cash ISA is generally more appropriate — the stock market can fall significantly over short periods. Long-term savings (5+ years): a stocks and shares ISA is likely to deliver significantly better returns. Historical UK equities have averaged 7–10% annually versus much lower cash ISA rates.
ISA vs pension — which comes first?
Generally, pension contributions take priority — they come with tax relief on contributions (reducing your cost) whereas ISAs do not. However, ISAs are better when you want access to money before age 57, you're a basic rate taxpayer and the pension advantage is smaller, or you've already used your annual pension allowance. An adviser can model the optimal split.
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