Do you need an ISA in 2025?

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 2025.

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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.

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 – and more could be round the corner – which have made ISAs much more valuable.

First though, a quick reminder of the different ISAs and how they work.

Of course, these are the current rules.

If there were changes introduced then there’s a risk that more money outside an ISA would be subject to tax on profits.

So you could lock in as much as you can afford this financial year, protecting that money not just in 2024/25, but each year after.

And even if you’re mainly saving in cash right now, putting it in an ISA now can help you if you want to invest large sums in a few years as you can transfer it across to use it to buy shares in a Stocks and Shares ISA without using any of that year’s allowance.

Pressure on tax-free savings allowances

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.

Last year we saw easy-access accounts paying more than 5% and regular savers hitting 5% to 7%. Though rates have been falling down again, those with decent yet not massive sums could well breach their allowance.

With £21,000 in a savings account paying 4.75%, a basic rate taxpayer will just be within their PSA, while a higher-rate taxpayer would be just within theirs if they had savings of £10,500.

And if you are fixing for a year or more, you’ll often get all the interest at once when the term ends, rather than monthly. And tax applies on interest when you can access it – so 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 2028. That means those who are close to those current levels could get pushed into the next tax band with each pay increase or promotion.

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 will no longer receive a PSA at all, so they’ll pay 45% tax on all the interest they earn.

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 at your marginal rate on any dividends paid outside an ISA.

Capital Gains Tax Allowance cuts

Cut over the same period is 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 before April 2023:

• April 2023 – cut to £6,000 a year
• April 2024 – cut to £3,00 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 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.

However, at the moment Cash ISAs are offering some of the top rates on the market – so we’d suggest putting your money there first to take advantage of the rates.

On top of this, an ISA is also definitely worth considering in the following circumstances:

• if you are a higher or additional rate taxpayer
• 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.

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