Interest earned inside an Individual Savings Account is free of UK Income Tax, with no cap and no phase-out. Whether your ISA holds £500 or £500,000, every penny of interest is paid gross and stays gross. The same wrapper also shelters dividends and capital gains, so the tax on ISA interest is, in practical terms, zero for as long as the money stays inside a qualifying account and you keep within the annual subscription rules.
How the Exemption Works
The rule sits in the Individual Savings Account Regulations 1998, which govern how money enters, grows, and leaves an ISA. Under those regulations, no Income Tax and no Capital Gains Tax are due on anything earned inside a qualifying account.1GOV.UK. Individual Savings Accounts The protection is automatic. Your provider pays interest without deducting tax, and HMRC does not send a bill for it later.
Your marginal rate is irrelevant. Basic-rate, higher-rate, and additional-rate taxpayers all get the same unlimited exemption on interest earned inside the wrapper.1GOV.UK. Individual Savings Accounts The exemption applies across all four ISA types:
- Cash ISA, which holds deposits and pays interest like a standard savings account.
- Stocks and Shares ISA, which holds shares, bonds, and funds.
- Innovative Finance ISA, which holds peer-to-peer loans and similar alternative investments.
- Lifetime ISA, designed for a first home or retirement, with a government bonus and strict withdrawal rules.
How ISA Interest Compares to the Personal Savings Allowance
Interest earned outside an ISA is covered by the Personal Savings Allowance, which lets you earn a limited amount of interest each year before tax applies:
- Basic-rate taxpayers get £1,000 tax-free.
- Higher-rate taxpayers get £500 tax-free.
- Additional-rate taxpayers get nothing.
Interest earned inside an ISA does not count toward these limits.2GOV.UK. Tax on Savings Interest For an additional-rate taxpayer, that is the difference between paying 45% on every pound of interest from a normal account and paying nothing on the same interest in an ISA. For a basic-rate saver, the £1,000 allowance disappears quickly once balances and interest rates are meaningful, and the ISA takes over from there.
The £20,000 Annual Limit
You can pay in up to £20,000 across all your ISAs in each tax year, which runs 6 April to 5 April. The allowance can be split between different ISA types, and since the 2024/25 rule changes you can open more than one ISA of the same type in the same year, as long as the total across every provider stays within £20,000.3GOV.UK. Individual Savings Accounts – Withdrawing Your Money The Lifetime ISA is the exception: it is capped at £4,000 a year, and that £4,000 counts toward your overall £20,000 limit.
What Happens if You Pay in Too Much
If your combined deposits go over £20,000, the excess loses its tax-free status. HMRC identifies these breaches through annual data matching after ISA managers submit their returns, and the excess has to be removed.4GOV.UK. How to Manage ISA Subscriptions If the oversubscription happened in the current tax year, your provider can correct it directly and you choose which deposits to pull. If it happened in a prior year, HMRC will contact you.
Interest earned on the removed portion is treated like ordinary savings interest. It counts against your Personal Savings Allowance for that year, and anything beyond the allowance is taxed at your marginal rate. Keeping a running total across every provider is the simplest way to avoid this.
Residency
You generally need to be a UK resident to pay into an ISA. If you move abroad, you must tell your provider as soon as you stop being resident, and you cannot make new subscriptions.5GOV.UK. Individual Savings Accounts – If You Move Abroad Crown employees working overseas, and their spouses or civil partners, are the exception and can keep contributing.
Moving abroad does not kill an existing ISA. The account stays open, interest continues to grow free of UK tax, and you can still transfer between providers. If you become UK resident again, you can resume contributions within that year’s allowance. Your new country of residence may tax the income under its own rules; the ISA exemption only governs UK tax.5GOV.UK. Individual Savings Accounts – If You Move Abroad
What Happens to ISA Interest After Death
An ISA does not lose its tax-free status the moment the account holder dies. It becomes a “continuing account of a deceased investor” and keeps its exemption from Income Tax and Capital Gains Tax until the earliest of three events: the administration of the estate is completed, the executors close the account, or three years pass from the date of death.6GOV.UK. Individual Savings Accounts – If You Die7Legislation.gov.uk. The Individual Savings Account Regulations 1998 – Regulation 2G After that, the provider closes the account and any further interest or gains become taxable in the normal way.
Inheritance Tax is separate. Although ISA income is exempt from Income Tax during the holder’s lifetime, the value of the ISA forms part of the estate for Inheritance Tax, and there is no special ISA carve-out.6GOV.UK. Individual Savings Accounts – If You Die
A surviving spouse or civil partner gets an extra allowance on top of their own £20,000, called an Additional Permitted Subscription. The APS equals the higher of the ISA’s value at the date of death or its value when the continuing account ends, taken across all of the deceased’s ISAs combined.8GOV.UK. How to Manage Additional Permitted Subscriptions The couple must have been living together at the date of death; separated couples under a court order or deed of separation do not qualify. The survivor does not need to inherit the ISA assets themselves.
Cash subscriptions using the APS must be made within three years of the death, or 180 days after the estate administration is completed if that is later. If the survivor is transferring the deceased’s actual investments in-kind, the deadline is 180 days after they receive beneficial ownership.8GOV.UK. How to Manage Additional Permitted Subscriptions Missing these deadlines forfeits the extra allowance for good.
Self Assessment and Reporting
You do not declare ISA interest, income, or capital gains on a Self Assessment return.1GOV.UK. Individual Savings Accounts ISA earnings also do not appear in the calculations for your Personal Savings Allowance or dividend allowance. Your provider handles the reporting side, submitting annual statistical returns to HMRC by 4 June each year.9GOV.UK. Submitting Annual Returns of Statistical Information for ISA Managers That reporting is what allows HMRC to spot oversubscriptions across providers, which is why breaches tend to surface after the tax year has closed rather than while you are still paying in.