Lesson 7.3 · 3 of 5 · Tax, pensions and protection where you live
ISAs in the UK explained: allowance, Lifetime ISA and Junior ISA
An ISA is a UK account where interest, dividends and gains are free of UK tax, with no need to report them. You can pay in up to £20,000 each tax year, split across cash, stocks and shares and Lifetime ISAs. Gilts and NS&I products have their own tax rules.
Terms in this lesson
- Government bonds
- Loans you make to the government, for a fixed interest rate.
- Compound interest
- You earn on your past earnings too, not just on the amount you started with.
- ETF
- A fund listed on the stock exchange that buys dozens or hundreds of companies at once.
Opening question
In the 2026/27 tax year, when the total ISA allowance is £20,000, you put £15,000 into a cash ISA. How much more can you put into a stocks and shares ISA in the same tax year?
The £20,000 is one allowance for all your ISAs together. You can split it however you like between types and providers, but the total cannot go above it.
It does not matter if you get it wrong: trying first helps you remember.
Gilts and NS&I: how UK government savings are taxed
A gilt is a UK government bond. Any gain when you sell or it is repaid is free of capital gains tax, but the interest, the coupon, is taxed as savings income.
NS&I is backed by HM Treasury. Premium Bonds pay prizes instead of interest, and the prizes are tax-free. You can hold up to £50,000.
Outside an ISA, interest is tax-free up to £1,000 a year for basic rate taxpayers and £500 for higher rate taxpayers. Above that, basic rate taxpayers pay 20%.
Check yourself
Outside an ISA, you buy a gilt for £9,500. It pays £50 of interest a year and repays £10,000 at maturity. What is subject to UK tax?
Gains on gilts are free of capital gains tax, so the £500 is not taxed. The interest is savings income, covered first by your Personal Savings Allowance. This is why low-interest gilts are popular with higher rate taxpayers outside an ISA.
ISA types and the annual ISA allowance
Definition
How does the allowance work?
£20,000 a year, shared by all your ISAs.
The tax year runs from 6 April to 5 April. You can put money into a cash ISA, a stocks and shares ISA and a Lifetime ISA in the same year, and even into several ISAs of the same type (but only one Lifetime ISA a year), as long as the total stays within the allowance. Allowance you do not use is lost at the end of the tax year. You must be 18 or over to open an adult ISA.
The most each type can take on its own. Together they cannot go above £20,000 a year.
Compare
Two higher rate taxpayers each invest £20,000 in the same fund, which pays no dividends. After 10 years each holding is worth £35,000 and they sell. Using the 2026/27 rules (£3,000 allowance, 24% rate) and no other gains, who keeps more?
Investor B. A has a £15,000 gain; after the £3,000 allowance, 24% of £12,000 is £2,880, so A keeps £32,120. B keeps £35,000. The longer you invest, the bigger the gap, because compounding makes the gain grow.
Myth or fact?
“If I take £5,000 out of my stocks and shares ISA, I can always put it back later in the same tax year without using any more allowance.”
This exercise is in the free account, where we also save your progress.
Create a free accountLifetime ISA and Junior ISA rules
| Rule | Lifetime ISA |
|---|---|
| Who can open one | aged 18 or over, with the first payment before 40 |
| How much you can pay in | up to £4,000 a year, until age 50 |
| Government bonus | 25%, so up to £1,000 a year |
| Withdraw without a charge | for a first home costing up to £450,000, from age 60, or if terminally ill |
| Any other withdrawal | a 25% charge on the amount you take out |
The charge is taken from the whole amount, bonus included, so you get back less than you paid in. At the Budget on 28 October 2026 the government said that, from 29 October 2026, the charge falls to 20% when the money is used to buy a first home above the price cap; other withdrawals that are not allowed still pay 25%.
Work it out
You paid £2,000 into a Lifetime ISA and received the 25% bonus, so the account holds £2,500 (ignore any growth). You withdraw it all for a reason that is not allowed, and the charge is 25%. How much do you get back, in pounds?
This exercise is in the free account, where we also save your progress.
Create a free accountA Junior ISA is for children under 18 living in the UK. Parents or guardians open it, and family and friends can add up to £9,000 a year in total. The child can manage it from 16, but the money is theirs and cannot be taken out until they turn 18.
- Transfer, do not withdrawTo move an ISA to another provider, ask the new provider to transfer it. Money you withdraw yourself cannot be paid back in without using the allowance again, unless the ISA is flexible.
- Use the allowance before 5 AprilAllowance left at the end of the tax year does not carry over.
- Match the ISA to the time frameCash ISA for money you may need soon, stocks and shares ISA for money you can leave for years.
What would you do?
You are 30, saving for a first home in about four years, and you have £10,000 to put into ISAs this tax year. What do you do?
This exercise is in the free account, where we also save your progress.
Create a free accountWhat you learned
- All your ISAs share one allowance of £20,000 per tax year, and what you do not use is lost.
- Inside an ISA, interest, dividends and gains are free of UK tax and do not go on your tax return.
- The Lifetime ISA adds a 25% bonus but charges 25% on withdrawals that are not allowed; gilts are free of capital gains tax.
One more time
The questions you got wrong, asked a different way.
Check yourself
Which part of a gilt held outside an ISA is free of UK capital gains tax?
Gilts are exempt from capital gains tax, so a gain is not taxed. The interest is savings income and is taxed above your Personal Savings Allowance.
You reached the end
Keep what you learned
With a free account we remember your lessons, bring back the questions you got wrong exactly when you need them and keep your streak.
Save your progress with a free accountLessons are educational. They are not a recommendation to buy or sell. Investing involves risk and you can lose money. Sources: GOV.UK, Individual Savings Accounts, Lifetime ISA, Junior ISA, Tax on savings interest and Tax when you sell shares; Budget 2026 and its Overview of tax legislation and rates (28 October 2026); NS&I, Premium Bonds. Rules checked on 29 October 2026; your own situation may differ, so check GOV.UK or ask HMRC or a qualified tax adviser.