ISAs and tax: what is tax free and what is not

An ISA is a tax shelter, not an account type with special rates. The government's own description of the scheme is that it "allows individuals to save through ISA accounts without being taxed on any income or gains arising from or received in relation to those savings"¹. In practice that means three UK taxes do not apply to money held inside an ISA: income tax on interest, income tax on dividends, and capital gains tax on investment growth². You do not declare ISA interest or returns to HMRC, and withdrawals are not taxed either³.

The shelter is not unlimited or unconditional. It lasts only while the money stays inside the ISA wrapper, it does not cover inheritance tax, and some tax deducted abroad on foreign dividends cannot be reclaimed. From April 2027 the rules also change: the amount people under 65 can pay into cash ISAs falls to £12,000 a year, a new government charge applies to interest on cash held inside stocks and shares ISAs, and under-65s lose the ability to transfer investment ISA money into cash⁴.

This page explains exactly what is tax free, what is not, and how ISAs sit alongside the allowances that apply to savings and investments held outside them.

ISAs are free of income tax, dividend tax and capital gains tax

The ISA scheme covers cash, stocks and shares and innovative finance accounts, and under the rules any income received in the form of interest or dividends, and any capital growth, is exempt from UK tax². Government guidance states this plainly: "All interest received on assets held within ISAs is entirely tax free"⁶, and NS&I's summary of the scheme is that "with an ISA, any returns you earn are free from UK Income Tax and Capital Gains Tax"¹². The same treatment applies whichever type of ISA you hold: a cash ISA, a stocks and shares ISA, an innovative finance ISA or a Lifetime ISA.

Three separate taxes are switched off inside the wrapper:

• Income tax on interest. Interest from a cash ISA, or from cash-like holdings, is paid without deduction of tax and is not part of your taxable income⁶.
• Income tax on dividends. Dividends from shares and funds held in a stocks and shares ISA are untaxed, even above the £500 dividend allowance that applies outside⁷.
• Capital gains tax. When you sell investments inside an ISA at a profit, no capital gains tax arises and the sale does not need to be reported².

The exemption is not a matter of the provider's generosity: it is set in the ISA regulations, which allow individuals to save through ISA accounts without being taxed on any income or gains arising from those savings¹. That is why the tax treatment is the same across every provider, from a high street bank to an investment platform.

Interest in an ISA sits outside the Personal Savings Allowance

Interest earned in an ISA is tax free, but it also does something subtly different: it leaves your Personal Savings Allowance untouched. NS&I's guidance for ISA savers is that "the interest you earn is tax-free, so it won't count towards your Personal Savings Allowance"¹³, and its general tax guidance makes the same point: "the interest you earn on ISAs and other tax-free accounts isn't taxable, so it won't use up any of your Personal Savings Allowance"⁸.

This matters because the Personal Savings Allowance is a use-it-or-lose-it annual cushion. If you have £1,000 of allowance as a basic-rate taxpayer and you earn £600 of interest in ordinary savings accounts, only £400 of headroom remains for the rest of the tax year. Interest earned inside an ISA never eats into that headroom, so the allowance stays fully available for taxable accounts⁸.

The Personal Savings Allowance is also, in NS&I's words, "completely separate to the annual ISA allowance"⁸. The £20,000 you can subscribe to ISAs each year and the £1,000 or £500 of interest allowance outside them are two different things, measured against different money. A saver can use both in full in the same tax year.

Personal Savings Allowance: £1,000, £500 or nothing

Outside an ISA, most people can earn some savings interest tax free each year, but the amount depends on their income tax band. Government guidance sets the figures: "Basic Rate taxpayers can receive £1,000 of interest without paying tax" and "Higher Rate taxpayers can receive £500 without paying tax"⁶. Additional-rate taxpayers get nothing: "Additional rate taxpayers don't have a Personal Savings Allowance"⁸. The allowance applies to each tax year, running from 6 April to 5 April the following year¹⁴.

There is also a second relief that sits alongside it. People on low incomes can receive up to a further £5,000 of savings interest at a 0% rate, on top of their personal allowance, under the starting rate for savings⁶. HMRC's own analysis describes these as "2 overlapping savings allowances: the Starting Rate for Savings (SRS) and the Personal Savings Allowance (PSA)"¹⁶, so a saver with little other income may have more tax-free room than the headline figures suggest.

Two points of detail are worth knowing. First, the rules are UK-wide: even though income tax rates differ in Scotland, "your Personal Savings Allowance is still based on the UK-wide rules"¹⁷. Second, the allowance has been frozen while interest rates rose, which is why more people have been dragged into paying tax on savings. One analysis put the value of the £1,000 allowance had it risen with inflation at £1,368 for basic-rate taxpayers and £684 for higher-rate taxpayers¹⁸. A Treasury committee report has also noted that any reduction in the Personal Savings Allowance "would bring many people into paying tax on small amounts of savings income and require Self-Assessment forms"⁴.

Dividends: ISA or the £500 dividend allowance

Dividends work on a parallel system. Inside an ISA or a pension, dividend income is untaxed whatever its size: "Within these wrappers, dividend income is untaxed, even if it exceeds the annual dividend allowance (£500)"⁷. Outside those wrappers, the first £500 of dividends in the 2026-27 tax year is taxed at 0%, with anything above that taxed at the dividend rates⁹.

The £500 figure is the end of a long series of cuts. HMRC's manual explains that the "allowance" is technically a 0% tax rate, the dividend nil rate, and traces its history: it applied to the first £5,000 of an individual's income in 2016-17 and 2017-18, and to the first £2,000 from 2018-19¹⁹. It was cut from £1,000 to £500 in April 2024²⁰, a reduction confirmed in official statistics on tax reliefs¹⁵.

The practical consequence is that the ISA has become more valuable to investors holding shares or equity funds directly. A portfolio producing £2,000 of dividends a year outside an ISA now generates taxable income above the allowance; the same portfolio inside an ISA generates none⁷. The trade-off is the subscription limit: you can invest up to £20,000 across your ISAs each tax year⁹, so large portfolios will always have a taxable portion.

Capital gains: tax free in an ISA, taxed above the annual exempt amount outside

Capital gains tax is a tax on the profit when you sell something that has increased in value²¹. Inside an ISA it simply does not apply: gains on investments held in the wrapper are exempt². Outside an ISA, you pay tax only on profits above your annual exempt amount²².

On the size of that exempt amount the documents in this field disagree. One investment guide states that "most people will only pay capital gains tax if they make more than £11,100 profit on their investments in a single year"²³, a figure from before the exempt amount was cut; the current figure used elsewhere on this subject is £3,000. Where the sources conflict without a ruling, treat the lower, more recent figure as the one to check against HMRC's current guidance.

The rates outside an ISA depend on your income tax band. For gains on assets other than residential property and carried interest, the official rates are 18% for income tax basic-rate payers and 24% for higher-rate payers²⁴. An older investment guide gives the rates as "either 18 per cent or 28 per cent of the gains depending on the tax band into which they fall"²³; the Budget 2025 rates document is the more recent authority²⁴. Special rates apply to carried interest (32%) and to gains qualifying for business asset disposal relief (14%)²⁴.

The scale of the exemption inside an ISA becomes clear from the numbers outside it: the Office of Tax Simplification noted that around 500,000 taxpayers are required to report capital gains disposals each year²⁵. None of those reports would be needed for investments sold inside an ISA.

How HMRC collects tax on savings and investments held outside an ISA

Tax on savings and investments held outside an ISA is collected in different ways depending on the type of income, and none of them involve a conventional bill for most people.

Savings interest. Banks and building societies pay interest gross, and HMRC collects any tax through your tax code or self-assessment, using the Personal Savings Allowance described above⁶. Interest earned inside an ISA never enters this process: "any interest or investment returns through an Isa are tax-free, so you don't have to declare these"³.

Dividends. Dividends are paid gross, and tax above the £500 nil-rate band is settled through self-assessment or an adjustment to your tax code¹⁹.

Capital gains. There is no bill and no automatic assessment: "You do not get a bill for Capital Gains Tax"²⁶. You must work out your liability yourself and report it. How you report and pay depends on whether you sold UK residential property²⁷, and you need details of what you bought and sold the asset for, the dates of ownership and disposal, costs and improvements, and any reliefs²⁷. Non-UK residents must report all sales of UK property or land even if no tax is due, though they do not need to report other assets that have increased in value²⁷. Capital gains tax can also arise when you sell something you inherited²⁸.

The contrast with an ISA is the point: none of this machinery applies to money inside the wrapper. No reporting, no tax codes, no self-assessment entries for ISA interest, dividends or gains³.

Taking money out: tax-free returns, but the shelter ends

Withdrawals themselves are tax free. Taking money out of an ISA does not create an income tax or capital gains tax charge, and the money you take is yours without deduction. The Lifetime ISA has its own withdrawal rules, with a charge in some circumstances, but once an investor has reached the age of 60, "any subsequent growth or interest earned by their Lifetime ISA will continue to be tax free"²⁹, and a parliamentary report describes the lifetime ISA as "entirely free of tax" when drawing down and withdrawing funds in retirement³⁰.

What changes is the status of the money after it leaves. Independent guidance puts it simply: "If you take money out of an Isa, it loses its tax-free status"³¹. Once in an ordinary account, interest on it counts towards your Personal Savings Allowance, and any future growth on it is taxable in the normal way. The shelter attaches to the wrapper, not to the money.

Two related points soften this. Some ISAs are flexible, allowing you to withdraw and re-deposit in the same tax year without using fresh allowance, covered in flexible ISAs. And transfers between ISAs, done properly through the ISA transfer process, keep the tax-free status intact, including moving money into a new stocks and shares ISA "without affecting your allowance"⁹.

Where the tax shelter stops: inheritance tax and death

The ISA exemption has one large exception: "savings and investments in Isas are free of tax (with the exception of inheritance tax)"³¹. When the holder dies, the value of the ISA forms part of their estate for inheritance tax purposes like any other savings. A large ISA can therefore increase an inheritance tax bill even though the money was never taxed during the holder's lifetime.

There are mitigations. A surviving spouse or civil partner can be granted an additional permitted subscription, which preserves the tax benefits of the deceased's ISA in defined circumstances, and the rules on what happens to an ISA when someone dies set out how long the tax-free status can continue during administration. Neither of these removes the inheritance tax exposure itself.

ISA changes from April 2027: a £12,000 cash limit for under-65s and new rules on cash in stocks and shares ISAs

The biggest change to ISA tax rules in years takes effect from 6 April 2027, the start of the 2027/28 tax year. The overall ISA allowance stays at £20,000, but the amount that people under 65 can subscribe to cash ISAs is reduced to £12,000¹⁰. The legislation sets this out: "the annual Cash ISA limit for those below the age of 65 will be set at £12,000, within the overall annual ISA limit of £20,000"³². The remaining £8,000 of the allowance is available for stocks and shares or innovative finance ISAs.

People aged 65 and over are unaffected. HMRC's guidance confirms that "individuals aged 65 and over will benefit from a higher cash ISA limit of £20,000, entitlement to which will apply from the start of the tax year in which an individual turns 65"³³.

Three further changes arrive at the same time:

• A charge on cash in investment ISAs. HMRC introduces a flat 22% charge on interest earned from cash held within a stocks and shares ISA, applying regardless of age⁵. Any interest earned on cash in investment ISAs will incur this government charge from April 2027³⁴. This is a significant exception to the "all interest in ISAs is tax free" rule that has applied until now.
• Cash-like assets restricted. HMRC defines "cash-like" assets as money market funds only, which remain eligible in stocks and shares ISAs provided they do not make up 100% of the portfolio⁵.
• Transfers into cash ISAs end for under-65s. From the 2027/28 tax year, under-65s will no longer be able to transfer money from a stocks and shares ISA or an innovative finance ISA into a cash ISA³⁵. Until then, the transfer rules allow cash ISA funds to move to a stocks and shares ISA or another cash ISA, while stocks and shares ISA funds can only transfer to another stocks and shares ISA².

Until April 2027, the current rules continue: under-65s can pay up to £20,000 into cash ISAs in the 2026/27 tax year¹⁰, and you can hold cash ISAs with multiple providers in the same year as long as the total stays within the overall limit³⁶. One special transfer route is unaffected by the age rules: shares taken out of a Share Incentive Plan can be moved directly into the stocks and shares part of an ISA within 90 days, free of capital gains tax, with the market value counting as an ISA subscription³⁷.

Where to find out more

The rules around ISAs and tax are set by HMRC and the ISA regulations, and the pages in this section cover each part of the picture: how an ISA works, the ISA allowance and the tax year deadline, cash ISAs explained and stocks and shares ISAs explained, what investments a stocks and shares ISA can hold, and the detailed guide to the April 2027 cash limit changes. For tax on savings and investments more broadly, see personal tax in the UK. Free, impartial guidance on tax and money questions is available from HMRC and MoneyHelper.