What is an ISA?

An ISA (Individual Savings Account) is a wrapper that makes your savings and investments tax-free. Inside it, interest and growth accrue with no income tax and no capital gains tax to worry about — so what you earn, you keep. It’s the closest thing most people get to a tax-free bank account.

The allowance

Every tax year (6 April to 5 April) you can pay in up to £20,000 across cash and stocks & shares ISAs combined. The catch: it doesn’t roll over. Miss a year and that year’s allowance is gone, which is why regular savers treat the ISA allowance as use-it-or-lose-it.

The two main types

• Cash ISA — a savings account where the interest is tax-free. The right home for an emergency fund and money you’ll need within a few years.
• Stocks & shares ISA — investments (funds, shares, bonds) whose growth is tax-free. Over 5–10 years it typically beats cash, but it can fall in value at any point — use it for money you won’t need soon.

Example. £5,000 in a stocks & shares ISA earning an average 5% a year for 20 years grows to about £13,300. Every pound of that growth is free of capital gains tax — outside an ISA, the same fund could trigger a tax bill on the gains.

How the numbers add up

The ISA calculator shows the difference. Save £250 a month for 10 years at 4% and the tax-free growth alone adds several thousand pounds on top of what you put in. Compare that to interest taxed through your Personal Savings Allowance, and the ISA wrapper is often a clear win.

A sensible order of operations

1. Emergency fund in an easy-access cash ISA (3–6 months of costs)
2. Short-term goals (holidays, a car, a deposit) in a cash ISA
3. Long-term goals (retirement, decades away) in a stocks & shares ISA

Keep each goal in the right type of ISA, and the £20,000 allowance will rarely feel like a constraint.

See the maths

Use the ISA calculator to project tax-free growth, the savings calculator for regular contributions, and the future value calculator to see what a lump sum becomes.