An ISA (Individual Savings Account) is a wrapper that shields your savings and investments from Income Tax, Dividend Tax, and Capital Gains Tax. For 2026/27, you can save or invest up to £20,000 across your ISAs in a single tax year — but that £20,000 can be split across several different types, each designed for a different purpose. Understanding what each one actually does helps you use the allowance more effectively, particularly with a significant change to the Cash ISA allowance confirmed for April 2027.
The £20,000 annual allowance — how it works
Every UK resident aged 18 or over gets a £20,000 ISA allowance each tax year, running 6 April to 5 April. You can split this across multiple ISA types in the same year — for example, £10,000 into a Stocks and Shares ISA and £10,000 into a Cash ISA — but you generally cannot pay into more than one ISA of the same type in the same tax year (with recent flexibility changes allowing multiple Cash ISAs from different providers in some circumstances). The allowance does not carry forward — unused allowance is lost at the end of the tax year.
Cash ISA
Works exactly like a normal savings account, except all interest earned is entirely tax-free, with no need to worry about your Personal Savings Allowance. Available as easy-access, notice, or fixed-rate versions, similar to standard savings accounts. The trade-off for the tax-free status is generally lower returns than investing, though this gap narrows during periods of higher interest rates.
Best suited to money you may need at short notice, or as a home for your emergency fund, since capital is not at risk of market fluctuation the way it is with investments.
Stocks and Shares ISA
Allows you to invest in shares, funds, bonds, and other investments within the tax-free wrapper — all dividends, interest, and capital gains generated inside the ISA are entirely free of tax, regardless of how much you hold or how much it grows. This is the natural home for long-term investing, since normal Dividend Allowance (£500) and Capital Gains Tax exemption (£3,000) limits do not apply to anything held inside the ISA.
Capital is at risk — the value can fall as well as rise — so this suits money you don't expect to need for at least five years, giving time to ride out market volatility.
Innovative Finance ISA (IFISA)
A less common ISA type that allows peer-to-peer loans and certain crowdfunding investments (such as debt-based securities) to be held within the tax-free wrapper. Interest and returns generated are tax-free, in the same way as the other ISA types.
This carries meaningfully higher risk than a Cash or Stocks and Shares ISA — peer-to-peer platforms are not covered by the Financial Services Compensation Scheme (FSCS) in the way bank deposits are, and borrower default is a real risk. Suited only to investors who understand and accept this risk profile as part of a wider portfolio.
Lifetime ISA (LISA)
Available only to those aged 18 to 39 when first opened. You can contribute up to £4,000 per year (counted within your overall £20,000 allowance), and the government adds a 25% bonus on top — up to £1,000 free money per year. Funds can be used to buy a first home worth up to £450,000, or withdrawn from age 60 for retirement, entirely tax-free either way.
The catch: withdrawing for any purpose other than a first home purchase or after age 60 triggers a 25% government withdrawal penalty — which, because of how the maths works, means you get back less than you paid in, not just losing the bonus. This makes the LISA inflexible if your plans change, so it should only be used for genuine first-home or long-term retirement saving.
Junior ISA (JISA)
A separate allowance — £9,000 for 2026/27 — held in a child's name but managed by a parent or guardian until the child turns 18, at which point it automatically becomes their own ISA and they gain full control. Available as either a Cash or Stocks and Shares JISA. This does not use any of your own personal £20,000 allowance — it's entirely separate.
Comparing the main options
| ISA Type | Annual limit | Risk level | Access |
|---|---|---|---|
| Cash ISA | Up to £20,000 | None (capital secure, FSCS protected) | Immediate to fixed-term, depending on product |
| Stocks and Shares ISA | Up to £20,000 | Variable — depends on investments held | Generally accessible, though selling investments takes a few days |
| Innovative Finance ISA | Up to £20,000 | Higher — not FSCS protected | Often limited — funds may be tied up in loans |
| Lifetime ISA | £4,000 (within the £20,000 total) | None (Cash LISA) or variable (S&S LISA) | Restricted — 25% penalty outside qualifying withdrawals |
| Junior ISA | £9,000 (separate allowance) | Depends on Cash or S&S version | Locked until the child turns 18 |
The upcoming Cash ISA change — April 2027
Confirmed change: from April 2027, the amount you can put into a Cash ISA specifically will be reduced from £20,000 to £12,000 for savers under 65. The overall £20,000 total ISA allowance is not changing — the difference simply has to go into a Stocks and Shares ISA, Innovative Finance ISA, or Lifetime ISA instead of cash. The stated aim is to encourage more long-term investment rather than cash saving. Savers aged 65 and over are expected to retain the full £20,000 Cash ISA allowance.
If you currently rely heavily on Cash ISAs — for example, holding your full £20,000 allowance in cash each year — this change means from April 2027 you will need to either accept a lower tax-free cash-saving limit or move some of that allowation into investment risk via a Stocks and Shares ISA to use your full £20,000. Worth planning for ahead of the change rather than reacting to it once it takes effect.
Which ISA (or combination) makes sense?
- Building an emergency fund or saving for something within 1–3 years? Cash ISA — capital security matters more than growth here.
- Investing for retirement or a goal 5+ years away? Stocks and Shares ISA — time in the market allows you to ride out volatility for potentially higher long-term returns.
- Saving for a first home, and under 40? Lifetime ISA — the 25% government bonus is difficult to beat, provided you're confident about the home-purchase timeline.
- Comfortable with higher risk in exchange for potentially higher returns? An Innovative Finance ISA might form a small part of a diversified portfolio, understanding the lack of FSCS protection.
- Want to give a child a head start? A Junior ISA, funded separately from your own allowance.
Many people sensibly use more than one type in combination — a Cash ISA for accessible short-term savings alongside a Stocks and Shares ISA for long-term growth, for example — splitting the £20,000 allowance to match different goals with different time horizons.
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Get in TouchThis article is for general information purposes only and does not constitute financial advice. We are not a financial adviser and this should not be treated as investment advice. The value of investments can fall as well as rise. Always speak to a qualified financial adviser before making investment decisions.