ISAs and other tax-efficient ways to save or invest

ISAs are tax-efficient savings and investment accounts.

You can use them to save cash – Cash ISAs – or invest in stocks and shares – Stocks and shares ISAs. 

An ISA is a ‘wrapper’ that shelters your investments or savings from tax – helping your money grow more quickly. The government sets a maximum amount that you can invest in ISAs. Until 2030 the annual limit is £20,000.

You pay no Income Tax on the interest or dividends you within an ISA and any profits from investments are free of Capital Gains Tax.

You can open and pay into as many ISAs as you like, apart from the Lifetime and Junior ISA, up to the current overall ISA contribution limit of £20,000. For the Lifetime ISA, the annual contribution limit remains at £4,000. 

You don’t have to transfer all the money from one ISA to another provider. You can transfer just some of your money, keeping your original one open, just like any savings account. The contribution limit is the total across all your ISAs in the tax year, which runs from 6 April to 5 April.

Before April 2024, you could only open and pay into one Stocks and shares ISA or one Cash ISA. You can now transfer from one ISA to another to take advantage of better deals. But not all providers accept transfers in, so you’ll need to shop around and look out for any hidden fees. 

Some platforms now offer multiple products from more than one provider. 

You must now be over 18 for all adult Cash ISAs (the minimum age was 16). 16 and 17-year-olds can still open and save into a Junior ISA, or they can continue to save into an adult ISA if it was opened before April 2024.

It’s possible to invest in specific companies by buying whole shares or smaller portions of a share. This is called a “fractional share”.  In November 2024 a new rule declared that any fractional shares you have already bought or buy in the future under the ISA wrapper will be tax free. Find out more about Stocks and shares ISAs in our guide.  

The Lifetime ISA is a longer-term tax-free savings account that will let you save up to £4,000 per year and get a government bonus of 25% (up to £1,000). As with other ISAs, you won’t pay tax on any interest, income or capital gains from cash or investments held within a Lifetime ISA.

It’s designed for anyone between the ages of 18 and 40 to use towards a deposit for their first home or towards future retirement savings once they hit 60 years of age.

Some ISA providers offer a flexible facility. This lets you withdraw and replace money from your ISA within the same tax year, without affecting your annual ISA allowance.

Not all ISAs let you do this, so check with your ISA provider. This flexibility is currently not available for Junior ISAs or Lifetime ISAs.

It’s important to let your provider complete an ISA transfer for you when it comes to moving your funds. 

If you simply withdraw and reinvest your money you would lose some or all of your ISA allowance for that year and possibly its tax-free status.

An innovative finance ISA (IFISA) lets you use your tax-free ISA allowance while investing in peer to peer (P2P) lending. They work by lending your money to borrowers and in return you receive interest based on the length of time and the risk of your investment.

Comparison websites are a good starting point for anyone trying to find a savings account tailored to their needs.

Comparison websites won’t all give you the same results, so it might be a good idea to use more than one site before deciding.

It’s also important to do some research into the type of product and features you need before making a purchase or changing provider.

Junior ISAs are a great way to save tax-efficiently for your children.

Family and friends can put up to £9,000 into the account on behalf of the child in the 2024/25 tax year.

There’s no Income Tax or Capital Gains Tax to pay on the interest or investment gains.

Junior ISAs are available to any child under 18 living in the UK who either hasn't got a Child Trust Fund, or wants to transfer their account over. For example, to get a better interest rate.

The scheme is now closed for new applications.

But if your child was born between 1 September 2002 and 2 January 2011, they’re likely to have had a Child Trust Fund opened for them.

These offer tax-efficient savings and came with a one-off starter payment from the government.

Currently, parents and friends can contribute up to £9,000 each year (2024/25 tax year) into a Child Trust Fund, while the child is under 18.

Parents can also transfer savings from Child Trust Fund accounts to Junior ISAs or into an ‘adult’ ISA when the account matures.

Your money is safe with National Savings and Investments (NS&I) because they’re backed by the government.

Premium Bonds are an investment product issued by National Savings and Investment (NS&I).

Unlike other investments, where you earn interest or a regular dividend income, you are entered into a monthly prize draw where you can win between £25 and £1 million tax free.

The government encourages you to save for your retirement by giving you tax relief on pension contributions within HMRC’s annual allowance limits.

Depending on the type of pension scheme you have, tax relief either reduces your tax bill or increases the amount paid into your scheme.

Where tax relief increases the amount paid in, you get the relief even if you’re a non-taxpayer.

On top of this, your pension fund grows tax-free.

When you retire, you can usually take up to 25% of your pension pot as a tax-free lump sum under current rules.

Your regular pension income is then taxed along with the rest of your income.

Alternatively, some pension providers allow flexible access to your pension pot with 25% tax free and the balance liable to Income Tax at your marginal tax rate. Check with your pension provider.

You can also save tax-efficiently for your child’s future retirement with children’s pensions.

You can save up to £2,880 each tax year with the government automatically topping up any contribution by up to £720 (which is tax relief of 20% on your gross (total) contribution). This means your contribution automatically becomes £3,600 per year, per child.

When your child turns 18 they become the owner of the pension. They can continue to contribute or leave the savings invested. They can't access the pension pot, under current legislation before age 55 years, (age 57 from 2028), so pensions aren't suitable as short-term savings vehicles.

When they retire, they can usually take up to 25% of their pension fund as a tax-free lump sum under current rules.

Their regular pension income is then taxed along with the rest of your income.

Most people get a personal savings allowance. This means non taxpayers and basic rate taxpayers don’t pay tax on the first £1,000 of savings interest (or the first £500 if you’re a higher rate taxpayer).

See How tax on savings and investments works for more information.

If you sell a property or investment that has increased a lot in value, you might have to pay tax on the ‘gain’ (profit).

This is called Capital Gains Tax.

There are two different rates of CGT – one for property and one for other assets. How much CGT you pay depends on whether you have made a profit, your current tax band and your CGT allowance. The CGT allowance for most individuals is currently £3,000 for the 2024/25 tax year.

If you make a loss when you sell, you might be able to deduct this from other gains so that your total gain is lower.

You don’t have to pay Capital Gains Tax on:

• investments held in an ISA
• UK government bonds (also called ‘gilts’), or most corporate bonds
• personal belongings worth £3,000 or less when you sell them
• any profit you make when you sell your main home (in most cases) subject to HMRC’s Private Residence Relief rules.

Because you have a separate Capital Gains Tax Allowance (Annual Exempt Amount) for each tax year, if you can carefully time the sale of your investments you could reduce your overall bill.

A financial adviser might be able to help you arrange things so that you pay less tax on your savings and investments.