Whether you’re saving or investing, ISAs are an essential defence for sheltering from UK tax and a smart way to strengthen your long-term finances.
A mix of frozen income tax thresholds and reduced tax-free allowances on savings, capital gains and dividends, mean that more people are being pulled into paying tax on their savings and investments. And with tax rate rises also on the horizon, more of your hard-earned returns could end up with HMRC.
All of this makes a compelling case for using your full annual ISA allowance before the 6 April deadline. And it could save you far more than you think.
This article isn’t personal advice. ISA and tax rules can change, and benefits depend on your circumstances. Remember, different income tax rates and bands apply to Scottish taxpayers for non-savings and non-dividend income. Savings and dividend income tax rates and bands are the same as the rest of the UK. If you’re not sure an action is right for you, ask for financial advice.
Here’s a reminder of the taxes your money and investments can be sheltered from inside an ISA.
Income tax on savings
Higher interest rates may have boosted savings returns, but they’ve also contributed to many more people paying tax on their interest.
Increasing numbers of taxpayers will breach their personal savings allowance (£1,000 for basic‑rate taxpayers, £500 for higher‑rate taxpayers, and nothing at all for additional‑rate taxpayers) in the coming years. These thresholds haven’t changed since they were introduced in 2016.
Be warned, a further sting awaits cash savers. From April 2027 tax rates on savings interest are set to rise, exceeding standard income tax rates – climbing to 22% for basic-rate taxpayers, 42% for higher-rate taxpayers and 47% for additional-rate taxpayers.
A Cash ISA provides a simple solution. All interest earned is completely tax‑free. Under 65s have this tax year and next to make the most of their £20,000 Cash ISA allowance before it drops to £12,000. So, it may be a case of use it while you can. For over 65s, the allowance won’t be changing.
Dividend tax
Dividends remain popular with investors who like to draw an income or reinvest the payout to buy more shares. But the dividend allowance is now just £500 a year, anything above this and tax may apply.
The tax rates on income from dividends – which are taxed at a different rate to your standard income – are tiered, with those in higher-rate and additional-rate tax bands paying the most. These rates will increase by two percentage points in April. Rising from 8.75% to 10.75% for basic-rate taxpayers, and from 33.75% to 35.75% for higher-rate taxpayers. For those paying the additional-rate of income tax, the dividend tax rate will remain unchanged at 39.35%.
However, inside a Stocks & Shares ISA, all dividend income is free of UK tax. So, if you hold dividend-producing shares outside an ISA and have unused ISA allowance for this year, you could consider Share Exchange (sometimes called a Bed & ISA) to move them into an ISA. Your investments will be sold and then rebought inside an ISA, so capital gains tax may apply if the gains exceed the £3,000 capital gains tax-free allowance.
But you could sell up to a gain of £3,000 and then repeat when the allowance resets for the new tax year on 6 April. There are other charges and factors to consider.
The deadline for placing an instruction to move shares into an ISA for tax year 2025/26 is 2pm on 2 April.
Capital gains tax
Capital gains tax (CGT) may be triggered when you dispose of your investment. Outside an ISA or pension, you can pocket the first £3,000 of any gains tax-free – down from £12,300 four years ago – but anything over that is taxed at 18% for basic rate taxpayers or 24% if you pay income tax at the higher or additional rate.
The beauty of investment gains in an ISA is that they are CGT-free. You can pocket and enjoy every penny of your returns, minus any investment charges you’ve paid along the way.
The ISA bonus many families overlook
ISAs do form part of your estate for Inheritance Tax (IHT), but their tax advantages don’t die with you. In fact, they keep on giving after you’re gone. ISA savings and investments can be passed on and retain the all-important tax-free status.
Thanks to what’s called the inherited ISA or additional permitted subscription (APS), a spouse or civil partner can receive a one-off ISA allowance broadly equal to the higher of the total value of your ISAs at the date of death and the total value of the ISAs at the point they are closed.
So, if you leave behind £200,000 in ISAs, your partner could receive an extra £200,000 ISA allowance, on top of their standard £20,000 allowance. The APS must be used within three years of the date of death, or within 180 days of the administration of the estate being finalised, whichever is later.
This applies even if the ISA money is left to someone else in a will – your spouse can still claim the extra allowance but will need to use their own money to fund the top-up.
Don’t let your ISA allowance go to waste
ISAs remain one of the simplest and most powerful ways to keep your money out of the taxman’s reach. Unlike pensions, unused ISA allowances cannot be carried over to the next tax year. If you don’t use your allowance by 5 of April, it’s gone for good.
Investments can go up and down in value, so you could get back less than you invest.