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This article is for general guidance only and is not financial or professional advice. Any links are for your own information, and do not constitute any form of recommendation by Saga. You should not solely rely on this information to make any decisions, and consider seeking independent professional advice. All figures and information in this article are correct at the time of publishing, but laws, entitlements, tax treatments and allowances may change in the future.
It’s been more than 25 years since ISAs were introduced in their current form, and they have been a favourite of savers. Rumours about the cash ISA allowance being cut have already prompted an influx of savings deposits.
ISAs are especially popular with older savers. There are just over six million ISA holders aged over 65, and they hold more money in those accounts than any other age group (over £60,000 on average). In total, around 15 million adult ISA accounts were actively paid into in 2023/2024, government figures show.
Below, we’ll explain how ISAs can help you Budget-proof your finances.
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If you’re trying to prepare for what the Budget has in store, there are several ways that ISAs can help.
Sarah Coles, head of personal finance at Hargreaves Lansdown, says: “If you’re worried about paying income tax on your savings interest, and you have the ISA allowance available, saving in a cash ISA will protect your hard-earned savings. At the same time, you can make the most of this year’s ISA allowance.
“The government said it won’t rush into any changes on ISAs, but there’s still the chance we could see tweaks proposed in the Budget – and changes to the cash ISA haven’t been ruled out. This is an opportunity to save tax-efficiently while you know where you stand.”
If you’re worried about being taxed on your income in retirement, it’s worth bearing in mind that income from an ISA can be taken tax-free, so it can help you to manage your tax bill in retirement.
There have been rumours of Budget increases in capital gains tax (CGT) and dividend tax. Coles says: “If you have concerns about possible rises in dividend tax or capital gains tax and you’re just starting on your investment journey, it makes sense for a stocks and shares ISA to be your first port of call, protecting you from both capital gains tax and dividend tax regardless of how your investments grow.”
There are four kinds of ISAs:
Whichever of these you choose, the main advantage is they’re free of all personal tax. Cash ISAs and stocks and shares ISAs are by far the most popular types.
Cash ISAs work just like ordinary savings accounts, meaning savers can choose between instant access, notice accounts and fixed rates. A stocks and shares ISA lets you invest in individual shares or other assets such as funds or investment trusts.
However, there are some drawbacks to ISAs that savers need to be aware of. It’s important to pay careful attention to the rules (and potential fees) on withdrawals and allowances.
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Currently, the annual ISA allowance is £20,000 per person per tax year. That means couples can shelter up to £40,000 between them (in separate accounts – you can’t have a joint ISA). You can pay into multiple ISAs each tax year, as long as you don’t go above the £20,000 allowance.
If you have a flexible ISA, you can withdraw money from it and put it back in in the same tax year, without it affecting your allowance. If the money you have withdrawn is from your deposits in that tax year, you don’t even have to put it back into the same ISA. But if it is a withdrawal from previous tax year’s payments, and you then want to put the money back again, it needs to be into the same ISA in order to preserve your full allowance.
It’s your responsibility to make sure you don’t go over the £20,000 ISA limit each financial year. This might be harder to keep an eye on if you’re paying into multiple accounts across different providers, or if you’re removing money and putting it back in with a flexible ISA.
If you invest in a stocks and shares ISA, your money is at risk as the value of their investments can go up as well as down. An independent financial adviser can be a good move for anyone feeling unsure about investments and wants to understand more about how they work.
The size of the potential tax savings from an ISAs varies depending on how much you have to save, and whether you’re saving or investing.
If you’re just saving cash, the tax bill on non-ISA savings is based on the amount of interest received. If you’re investing, capital gains tax (CGT) and tax on dividends can also come into play. If your money is held in an ISA, you won’t have to worry about these taxes if your money grows in value.
While savers do get allowances on the amount they can earn before tax, these have been shrinking in recent years, meaning the tax savings from ISAs become even greater.
If you save money in a standard (non-ISA) cash savings account, there’s a chance you might have to pay income tax on the interest you earn. But if this money is held in a cash ISA any interest savers make will be sheltered from tax.
Most savers do get a personal savings allowance – the amount a person can earn each year in savings interest, free of income tax. This has been frozen at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers since it was launched in 2016, and nothing for additional-rate taxpayers.
All of these tax rates are based on the UK tax thresholds, even if you pay income tax in Scotland, which has different rates and bands.
For people on a low income, there is also a starter rate for savings, which was introduced in 2015. It means that if your income is below the tax-free personal allowance of £12,570, you can earn an extra £5,000 in savings interest tax free. If your income is between £12,570 and £17,570, the allowance reduces by £1 for every extra £1 you have in income. This allowance, too, has effectively become less generous because the personal allowance has been frozen since £2021.
More people have been paying tax on their savings, due to rising interest rates and frozen tax thresholds. For 2025/26, 2.64 million people are expected to pay tax on savings interest, of which 1.16 million are pensioners.
Rachael Griffin, tax and financial planning expert at Quilter, says: “A higher-rate taxpayer with a savings account paying 5% in interest would need just £10,000 in cash savings [or £12,500 with savings paying 4% in interest] to use up this £500 personal savings allowance – they would then probably be subject to tax on the interest they earn above this.”
A basic-rate taxpayer with more than £25,000 in 4% interest cash savings held outside of an ISA could be liable to pay some income tax on those savings.
Investors may have to pay capital gains tax (CGT) and dividend tax on investments outside of an ISA. Capital gains tax is charged if you sell investments and make a profit. It’s charged at 18% for basic-rate taxpayers or 28% if you’re on the higher or additional rate.
The annual amount you can earn in profit without paying CGT is £3,000 per tax year. However, if you hold these investments in an ISA, any gains you make won’t be subject to CGT.
When a company makes a profit, it can give some of this back to shareholders in the form of a dividend. The amount of tax paid on dividends is linked to the income tax band of the person who receives them. The rate for basic rate taxpayers is 8.75%, rising to 33.75% for higher-rate taxpayers and 39.35% for those who pay the additional rate.
Again, the UK tax threshold is the relevant one for CGT and dividend tax, even if you pay income tax at Scottish rates.
The tax-free allowance on dividends from investments dropped from £1,000 to £500 in the 2024/25 tax year. This means that dividends on non-ISA investments over £500 a year are subject to income tax. But, again, any dividends received from shares held in an ISA won’t be subject to tax.
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With our Stocks & Shares ISA and General Investment Accounts. Capital at risk.
