ISA (individual savings account)

An individual savings account is a UK account type that shelters money from tax. Interest, dividends and capital gains earned inside an ISA are free of UK income tax and capital gains tax, and withdrawals are tax-free and do not need to be reported on a tax return. You can pay in up to an annual allowance set by the government, and unused allowance cannot be carried forward to later years. The main types are cash ISAs and stocks and shares ISAs, with other variants for specific purposes, such as saving for a first home or for children. ISAs are generally available only to UK residents.

An ISA is a wrapper, not an investment: what matters is what you hold inside it and the fees charged. Because gains and income are sheltered indefinitely, using the allowance year after year can make a large difference over decades. Common misunderstandings are that money withdrawn can always be paid back without using new allowance (only some “flexible” ISAs allow this) and that the tax break follows you abroad; if you move country, the new country may tax the income and gains. The government changes the rules and allowances from time to time. Other countries have similar tax-free savings wrappers, and a US Roth IRA works in a comparable way for retirement savings.