Money inside an ISA grows entirely free of income tax, dividend tax and capital gains tax, and withdrawals are tax-free too. The overall allowance is £20,000 per tax year across cash ISAs, stocks and shares ISAs, and the Lifetime ISA (which has its own £4,000 sub-limit and a 25% government bonus for first homes or retirement).
With the Personal Savings Allowance, dividend allowance and CGT exemption all cut or frozen in recent years, the ISA wrapper does more work than ever. Allowances do not roll over: unused ISA room on 5 April is gone. Compare cash returns with the ISA Calculator.
£20,000 in a cash ISA at 4.5% earns £900 completely tax-free. The same money in an ordinary account costs a higher-rate taxpayer £160 (40% on the £400 above their £500 savings allowance), every single year. Over a decade of compounding, the wrapper quietly saves four figures without you doing anything.
