What an ISA actually does
An Individual Savings Account (ISA) isn't a product in itself — it's a tax wrapper. Anything you hold inside it, whether that's cash or investments, grows free of Income Tax, Capital Gains Tax and (for dividends) Dividend Tax. Every UK resident adult gets an annual ISA allowance of £20,000 for the 2026/27 tax year, which can be split across different types of ISA in any combination you like, as long as you don't exceed £20,000 in total and (with one exception) only pay into one of each type per tax year.
The four main types of ISA
| ISA type | Who it's for | Annual limit |
|---|---|---|
| Cash ISA | Anyone 18+ (some providers allow 16+) wanting tax-free interest | Part of the £20,000 total |
| Stocks & Shares ISA | Anyone 18+ investing for the medium-to-long term | Part of the £20,000 total |
| Lifetime ISA (LISA) | 18–39-year-olds saving for a first home or retirement | £4,000 (counts towards the £20,000 total) |
| Junior ISA (JISA) | Under-18s, opened by a parent or guardian | Separate £9,000 allowance |
Cash ISA
Works like a normal savings account, but interest is tax-free. Since most basic-rate taxpayers already get a £1,000 tax-free Personal Savings Allowance on ordinary savings interest anyway, Cash ISAs matter most to higher and additional-rate taxpayers (who get a smaller or no Personal Savings Allowance), and to anyone with large enough savings balances that ordinary interest would exceed their allowance.
Stocks & Shares ISA
Lets you hold shares, funds, investment trusts and bonds inside the tax-free wrapper. There's no Capital Gains Tax on growth and no further tax on dividends received inside the ISA. Because investments can fall as well as rise, this type suits money you won't need for at least five years.
Lifetime ISA (LISA)
Designed specifically to help first-time buyers and long-term retirement savers. You can pay in up to £4,000 a year, and the government adds a 25% bonus on top — up to £1,000 a year free money. The money (plus bonus) can be used towards a first home worth up to £450,000, or withdrawn from age 60 for retirement. Withdraw it for any other reason and you'll pay a 25% government withdrawal charge, which can leave you with less than you paid in — so a LISA is a poor place for money you might need for something else.
Junior ISA (JISA)
A tax-free wrapper for saving on behalf of a child, with its own separate £9,000 annual allowance. Anyone can contribute, but the money belongs to the child and they can access it from age 18 — worth bearing in mind, since there's no way for a parent to restrict how an 18-year-old spends it.
How to choose between them
A sensible starting point for most people: build up an easy-access emergency fund first (in a normal savings account or Cash ISA), then use a Stocks & Shares ISA for money you're investing for five-plus years, and consider a LISA specifically if you're saving for a first home or are a long way from retirement and want the 25% bonus. You don't have to pick just one — many people use a mix within the same £20,000 annual limit.
Key takeaways
- The overall ISA allowance is £20,000 per tax year, shareable across ISA types.
- LISAs get a 25% government bonus but carry a 25% withdrawal penalty if used for anything other than a first home or retirement from age 60.
- JISAs have their own separate £9,000 allowance and become the child's money at 18.
- Unused ISA allowance doesn't carry over — it's lost at the end of each tax year.