When these tax-free accounts might be useful
Just because you can use an ISA for savings and investments, should you? Find out how to decide if you need an ISA in 2026.
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What’s the point of an ISA?
The whole point of an ISA (or Individual Savings Account) is that any money you make from cash within one is tax-free. This continues year after year – once the money is in an ISA it’s protected.
ISAs become much more valuable when savings rates and earnings increase. This is because more people end up exceeding their Personal Savings Allowance and having to pay their usual rate of tax on their savings interest.
But if you stick your money in an ISA or across different ISAs, all your earnings are tax-free. This includes savings interest from Cash ISAs and any dividends issued from investments or gains (i.e. profit) made from selling shares in a Stocks & Shares ISA.
How ISA rules are changing
First though, a quick reminder of the different ISAs and how they work at the moment.
Key ISA rules for 2025/26 and 2026/27
- There are four types of ISA – Cash, Stocks & Shares, Lifetime and Innovative Finance
- You can now pay into as many of each type as you want
- There’s a combined limit of £20,000 that you can put into them each year (including a £4,000 limit of the Lifetime ISA)
- You keep previous year’s allowances but can’t roll over any that was unused
- You can transfer your ISA money to a new provider which keeps it shielded from tax and doesn’t impact your current year’s allowance
You can read more on how ISAs work in our full guide.
Of course, these are the current rules. Last year, the government announced changes to ISAs which will begin in April 2027.
ISA rules changes from 2027/28
They key change is a reduction in the Cash ISA allowance each year, falling to £12,000. This is still part of the overall £20,000 rather than separate. So you could have £12,000 in a Cash ISA and £8,000 in a Stocks & Shares ISAs, or increase the amount you have in stocks up to that £20,000, reducing the amount available for cash.
This cut only applies to people aged 64 or under. Once you turn 65 it’ll revert to existing levels, meaning you can put up to £20,000 in a Cash ISA if you want. It’s not yet been decided whether this will kick in on your 65th birthday or if you’ll need to wait until the start of the next financial year.
The other changes announced will go to consultation within the industry so aren’t set in stone or fully detailed, but here’s what the government is planning.
To stop people gaming these new rules, there is an additional restriction added to transfers. From 2027, those under 65 won’t be able to transfer Stocks & Shares ISAs or Innovative Finance ISAs into Cash ISAs at all.
Plus, anyone thinking they can just keep £20,000 in cash or cash-like investments in a Stocks & Shares ISA or Innovative Finance ISA is sadly going to lose out as that interest will be charged tax. It’s not clear how these cash-like investments will be assessed.
Finally, Lifetime ISAs are going to be replaced with another product for first-time buyers. There’ll be consultation in 2026 to work out what the new ISA will look like, and what will happen to existing LISA holders.
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Pressure on other tax-free savings allowances
Tax-free sounds good, right? Well, an ISA isn’t the only way to avoid tax on interest earned or gains on investments. There are different allowances on savings, dividends and gains, and you can also save tax-free in Premium Bonds.
These have been enough for most savers and investors in recent years – an ISA just hasn’t been that important. However, lots of things have changed which have made ISAs much more valuable.
The Personal Savings Allowance hasn’t changed, but a couple of factors could impact when you start paying tax on interest earned outside an ISA.
Higher interest rates
The Personal Savings Allowance (PSA) allows basic rate taxpayers to earn £1,000 of interest tax-free every year, even if it’s outside of a Cash ISA (in fact earnings from an ISA don’t count towards the PSA). Higher rate taxpayers get £500 a year, while there’s nothing for Additional rate taxpayers.
With interest rates so low for so long, most savers may not have needed to bother with an ISA for cash, and instead could focus on the highest paying savings account. However, that’s not the case anymore.
In the last few years we’ve seen easy-access accounts paying more than 5% and regular savers hitting 7%, making it easier to go over your PSA.
However rates have been falling down, so those with decent sums could once again find interest earnings are within their allowance. With £25,000 in a savings account paying 4%, a basic rate taxpayer will earn £1,000, while a higher-rate taxpayer would be just within their £500 limit if they had savings of £12,500.
It could be different though for those fixing for more than a year. You’ll often get all the interest at once when the term ends, rather than monthly or yearly. Since tax applies on interest when you can access it, you could find you’re hit with a bill at the end of the term because the interest has accumulated over several years and pushed you over your allowance.
Frozen tax bands
The 20% and 40% tax bands are being frozen until 2031. That means those who are close to those current levels could get pushed into the next tax band with each pay increase or promotion. You might have heard the term “Fiscal Drag” used when talking about this.
And once you earn £50,270 a year you lose half your PSA. Combined with increased interest rates that £500 could be quite easy to fill.
Meanwhile, the income threshold before you pay 45% tax dropped from £150,000 to £125,140 a year in April 2023. That meant that those who earn above this new level no longer receive a PSA at all, so they pay 45% tax on all the interest they earn.
Higher tax rates on savings
From 2027 the rate of tax you pay on interest outside of your PSA will increase by 2 percentage points. So basic rate earners will pay 22%, higher rate 42% and additional 47%. This could make ISA rates more competitive in comparison.
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Changes to tax-free investing allowances
The tax rates on money you make from investing aren’t changing, but the allowances that give you some tax-free profit outside of an ISA have been cut in the last few years, making ISAs all the more important.
Dividend Allowance cuts
Some shares you’ve invested outside of an ISA might pay out dividends throughout the year, effectively bonus payouts, usually if the company has done well. You’re taxed on this, but receive a Dividend Allowance of £500 that is tax-free regardless of your tax rate.
- April 2023 – cut from £2,000 to £1,000 a year
- April 2024 – cut to £500 a year
If you have a lot of shares that issue dividends, or perhaps you receive them from a limited company, this reduction will mean you’ll be more likely to pay tax on any dividends paid outside an ISA.
Capital Gains Tax Allowance cuts
Cut over the same period was the tax-free allowance for Capital Gains. Again this is for shares that aren’t in an ISA (though obviously you can also make gains on other sales like second properties or expensive art).
The allowance is currently £3,000. That’s dramatically lower than £12,300 a year available before April 2023:
- April 2023 – cut to £6,000 a year
- April 2024 – cut to £3,000 a year
Now, £3,000 might be enough for investors who make a profit when selling shares, but over time it’s more likely you’ll see gains that go past this.
One note here is that you can combine allowances as a couple, effectively doubling how much is tax-free.
The best way to use your ISA allowance
This will obviously vary for everyone as you’ll all have different savings, investments and goals. I’m ignoring Lifetime ISAs here, though they are worth considering in the mix if you are hoping to buy a first home.
It’s worth just remembering that for most people to save or invest £20,000 in a year is quite unlikely. So you’ll probably have enough of your annual allowance to pay into a mix of different ISAs.
If you’ve got investments
If you are an investor, then there’s a chance you’re going to pay more tax over time as your profits grow when that’s outside an ISA.
For new money, it makes sense to put it into a stocks and shares ISA rather than a General Investment Account (GIA) – assuming you aren’t already doing this.
When it comes to existing money saved in a UK GIA you might want to transfer those stocks and shares into an ISA via something called ‘Bed and ISA’. The idea is that you sell your shares, and buy them again in an ISA at the same time. However, there could be fees and the value could change while this is happening.
You’ll pay tax on gains outside of the capital gains tax allowance when you do this, so if you have substantial amounts invested, only move over as much as fits within that – though of course you’ll also be restricted to £20,000 each financial year.
If you’re worried about the lower Cash ISA allowance from 2027
Most people are still going to be fine with a limit of £12,000 a year in new cash deposits to ISAs when the new rules kick in. But if you have money currently held in Stocks & Shares ISAs that you will want in cash, you might want to transfer some of it across or pay more into a new Cash ISA before April 2027.
If you’re worried about your Personal Savings Allowance
For those earning less than £50,270 a year with a few hundred or a few thousand in savings, even putting them in the highest paying accounts are unlikely to go past their PSA, so I’d suggest putting your money there first to take advantage of the rates whether an ISA or not.
However, an ISA is also definitely worth considering in the following circumstances:
- if you are a higher or additional rate taxpayer
- if you think you’ll get a payrise that puts you into a higher tax bracket
- if you have large sums earning decent interest rates
- if you have a long-term fixed account paying interest at the end
If you exceed your ISA allowance and PSA, you can also use Premium Bonds, which offer tax-free prizes.
And if you’re a low earners also get access to the Starting Rate of Savings.
ISAs are almost never tax free!
Most people will fund them from taxed earnings and would be far better off paying into a pension.
For example, a higher rate tax payer invests £100 in a pension and £100 is invested. But take that as salary and after tax and NI would only receive £58. So the ISA would have to grow over 70% just to get back to the £100 you started with!
A little know factor for lower earners/income people with larger sums earning interest is the Starting rate for savings. Correct me if I’m wrong, but you can use your personal tax allowance against savings. Then beyond your personal allowance you get another 5k starting rate savings and your personal saving allowance on top if you qualify.
Effectively if you are a basic rate tax payer with a personal allowance of £12570 and hypothetically earnt £12570 in earning/wages you could earn an additional 5K interest on saving in a tax year and pay no tax. Also, you could earn another 1K personal savings allowance, tax free.
https://www.gov.uk/apply-tax-free-interest-on-savings
Absolutely correct Andrew.
I am amazed this is rarely mentioned.