Do I pay tax if I take money out of an ISA?

Taking money out of an ISA does not create a tax bill. With an ISA, any returns you earn are free from UK Income Tax and Capital Gains Tax, and that stays true when the money leaves the account¹. You do not pay tax on the withdrawal itself, and you do not have to declare ISA interest or investment returns on a tax return².

What a withdrawal can cost you is the wrapper. Money taken out of an ISA loses its tax-free status, and if you pay it into a different ISA it counts towards your annual allowance for that tax year³. So the tax question has two answers: no tax on the money coming out, but a real cost if the money was meant to stay sheltered.

The one clear exception is the Lifetime ISA, where taking money out before age 60 for anything other than a first home normally means a 25% charge⁴. Everything else depends on which type of ISA you hold and whether it is flexible.

Why no tax is due: income, interest and gains inside the wrapper

An ISA is a wrapper. The tax treatment attaches to the account, not to the moment you take money out. Any returns you earn inside it are free from UK Income Tax and Capital Gains Tax, and that protection covers interest on cash, dividends on shares, and gains on investments¹. A cash ISA protects your savings from the income tax that is deducted at source on an ordinary bank account, and any income received from ISA investments is not taxed any further⁷.

The Resolution Foundation describes the position in the same terms: individuals are exempt from paying tax on any income, meaning dividends, interest and bonuses, or capital gains they receive from their ISA savings and investments⁸. That exemption is what makes the withdrawal itself a non-event for tax purposes. There is no charge triggered by moving money out, no reporting requirement, and no interaction with the rest of your tax position.

The practical consequence is that ISA withdrawals sit outside the tax return entirely. Any interest or investment returns through an ISA are tax-free, so you do not have to declare them². If you complete a self assessment return for other reasons, such as self-employed income or higher-rate tax relief, the ISA does not add anything to it.

Where the tax-free rule does have a boundary is uninvested cash held inside a stocks and shares ISA. Interest arising on uninvested cash held in a stocks and shares ISA is subject to a flat rate charge representing tax at basic rate⁹. That is a charge inside the wrapper on cash that has not been invested, not a tax on withdrawals, and it is why holding large sums in cash within an investment ISA is different from holding them in a cash ISA.

Cash ISA or stocks and shares ISA: how withdrawals work in each

Both types let you take money out without tax, but the mechanics and the consequences differ.

A cash ISA works like a savings account with a tax exemption attached. You can withdraw from a Cash ISA whenever you need to, but replacing any withdrawn funds may impact your tax-free allowance¹⁰. The interest earned on a Cash ISA does not count towards your Personal Savings Allowance, meaning you do not pay any income tax on it¹¹.

A stocks and shares ISA holds investments rather than cash, so taking money out usually means selling something first. When you sell investments in an ISA, you do not have to pay Capital Gains Tax on your profits¹². Returns on investments held in stocks and shares ISAs are free of income tax, dividend tax and capital gains tax⁵. That is the difference from holding the same investments outside an ISA, where you may incur a capital gains tax liability on them when sold¹³.

The withdrawal itself is not a taxable event in either case. What changes is where the money sits afterwards. Money withdrawn from an ISA loses its tax-efficient status and counts towards the annual ISA allowance if added to a different ISA¹⁴.

Money taken out loses its tax-free status

This is the part that catches people out. The tax exemption belongs to the account, so once money leaves it, the exemption does not travel with it. If you take money out of an ISA, it loses its tax-free status³. The same applies whether the money goes to a current account, a savings account or as cash: withdrawing money from an ISA to any of those means the money loses its tax-free status¹⁵.

The allowance consequence is separate and often more expensive. If you take your money out of an ISA during the year it still counts towards your limit and you lose the tax advantages on it⁷. In other words, the subscription you made earlier in the tax year is not undone by the withdrawal. If you then pay the money into another ISA, that payment is a fresh subscription and uses allowance you may have wanted for new saving.

There is one arrangement that avoids this. Flexible Isas allow you to withdraw funds from an Isa and replace it, without it affecting your annual Isa allowance, as long as you do so into the same account, and in the same tax year¹⁶. Providers are not obliged to offer flexible ISAs, so the feature depends on the account you hold rather than on the ISA rules themselves.

Lifetime ISA withdrawals: where the tax-free rule has limits

The Lifetime ISA is the exception to the general rule that ISA withdrawals are tax-free. You can withdraw the money tax-free after age 60. If you take it out earlier, unless buying a first home, you pay a 25% charge⁴. The charge is calculated on the amount withdrawn, and because the government bonus is included in the pot, it can take back more than the bonus alone.

The official guidance is blunt about the arithmetic. If you wish to withdraw the entire pot, a 25% charge will apply to the total amount in your ISA, including the government bonus¹⁷. For a partial withdrawal, you will have to withdraw more than the amount you need, to cover your needs and the 25% withdrawal charge¹⁷. There is no limit on how much an investor can withdraw from their LISA, so the charge scales with whatever you take¹⁸.

The charge as applied to withdrawals is 25% of the amount taken out, which is the figure the official withdrawal guidance gives¹⁷. That means a saver who needs a set amount has to take out more than they need, to cover their needs and the 25% withdrawal charge¹².

Two situations sit outside the charge. Funds are accessible and tax- and penalty-free from age 60¹⁹, and a withdrawal to buy a first home within the rules is also charge-free⁴. There is also an administrative carve-out: if individuals pay more than they are allowed into a Lifetime ISA account, the excess contributions will be removed from the account and do not count as a withdrawal²⁰.

Moving an ISA: transfer it, do not withdraw it

If the aim is to move an ISA to a different provider, the transfer process exists precisely to protect the tax-free status. Transferring your ISA protects your tax-free status, so you will continue to maintain the tax benefits in the process²¹. Withdrawing the money yourself and paying it into the new account does the opposite: if you make the payment yourself, your money will lose its tax-free status²².

The instruction from providers is consistent. Do not withdraw money from a Cash ISA yourself, as this will result in the loss of its tax-free status²³. To switch between cash ISA providers, you must request a transfer; if you withdraw the money yourself, you lose the tax-free status on the entire sum²⁴. The same applies to investment ISAs: when transferring ISAs, it is very important that you do not close the account and withdraw the money to pay into your new one²⁵.

The process works like this:

1. Open the new ISA with the provider you want to move to.
2. Ask that provider for an ISA transfer form, or complete the transfer request in its app or online service.
3. Give the details of the existing ISA, including the account and provider.
4. The two providers move the money directly between them. You do not handle it.
5. The old account is closed or reduced, depending on whether it is a full or partial transfer.

If you simply withdraw money from your existing ISA, it will lose its tax-free status, and if you pay it back into another ISA, this will count towards your annual allowance for the current tax year¹⁴. Doing so will mean you lose the tax benefits of saving in an ISA, and if you then put this money back into another ISA, this counts towards your current year ISA allowance²⁶.

What happens when a fixed-rate cash ISA matures

A fixed rate cash ISA ties your money up for a set period in exchange for a fixed rate of interest. During that term, access is restricted. You usually cannot withdraw money during the fixed term without penalty, unless the product rules allow it¹. Fixed-rate accounts may charge you an interest penalty if you withdraw money or close the account before the fixed period ends²⁷.

At the end of the term, the account matures and your options open up. The money you withdraw or transfer will lose its tax-free status, or you can complete an ISA transfer to keep it²⁸. Many providers move the balance into a variable rate account automatically if you do nothing, which is why the maturity notice matters: it is the point at which you decide whether to transfer, withdraw, or leave the money where it is.

To transfer your ISA and its entire balance to another ISA, either with the same provider or another one, you need to follow the ISA transfer process. Do not just withdraw the money, as you may lose your tax-free status²⁹.

Cash ISA allowance changes and what they mean for withdrawals

The rules on what you can pay into a cash ISA are changing, and the change matters for anyone planning withdrawals around future contributions. Money already held in a cash Isa will keep its tax-free status, and the new limits will apply to money paid in from April 2027 onwards³⁰. So the change affects new money going in, not the tax treatment of what is already there or of money you take out.

For withdrawals, the practical points are unchanged by the reform. Money taken out still loses its tax-free status, and paying it into another ISA still uses allowance. What changes is the amount of new cash ISA money you can shelter from April 2027, which makes the decision to withdraw and replace more consequential: if the replacement counts against a smaller cash ISA allowance, the room to put it back may not be there.

Does ISA interest count towards my Personal Savings Allowance?

No. Interest from ISAs is tax-free, so it does not count towards your Personal Savings Allowance⁶. The same point is made across the market: unlike most ways of saving, interest earned from an ISA does not count towards your Personal Savings Allowance³¹, and interest received on an ISA does not count as part of the Personal Savings Allowance³². The tax-free interest you earn in an ISA does not count towards your Personal Savings Allowance³³.

That matters because the Personal Savings Allowance is a fixed amount of interest you can earn outside an ISA before tax applies. Interest from ISAs does not count towards it because it is already tax-free³⁴. A cash ISA's interest is completely tax-free and does not count towards the PSA³⁵, and the interest you earn will not count towards your personal savings allowance, so you will not pay tax on it³⁶.

The official position is the same. The interest you earn on ISAs and other tax-free accounts is not taxable, so it will not use up any of your Personal Savings Allowance³⁷. Keeping savings in an ISA therefore leaves the full allowance available for interest earned on ordinary accounts, which is the main reason the wrapper is worth preserving even when rates elsewhere look similar.

Where the tax-free rule stops

The exemption is broad but not unlimited. It covers income, interest and capital gains inside the wrapper while the money stays in ISAs, free from UK Income Tax and Capital Gains Tax³⁸. It does not follow the money out. Once withdrawn, the sum is ordinary money: any interest it earns afterwards is taxable in the usual way, and any investments bought with it sit outside the ISA shelter.

The Lifetime ISA charge is the sharpest limit, applying a 25% charge to withdrawals that are not for a first home or after age 60⁴. Fixed rate cash ISAs impose their own limit during the term, through an interest penalty for early access²⁷. And the allowance rule means a withdrawal followed by a payment into a different ISA consumes allowance that cannot be recovered in the same tax year¹⁴.

For free, impartial help with savings and tax questions, MoneyHelper offers guidance, and the Financial Ombudsman Service can look at complaints about an ISA provider if something goes wrong with a transfer or a withdrawal. If a provider has failed, the Financial Services Compensation Scheme covers eligible deposits and investments, and the rules on how ISA money is protected are set out in How your ISA is protected.