how to save and invest, tax-free

First launched in 1999, Isas – more formally known as Individual Savings Accounts – have become a hugely popular way for savers and investors alike to shield their money from tax. 

That’s because savings interest and investment returns earned from money held in an Isa is tax-free, shielding you from potential income tax, capital gains tax and dividend tax charges.

But there are several rules you’ll need to abide by to keep this tax-free status. For instance, all adults in Britain get an Isa allowance of £20,000 – this is how much you can deposit into Isa accounts during each tax year. 

Plans announced in the 2024 Spring Budget will see an extra £5,000 Isa allowance for those willing to invest via a Great British Isa, for UK-listed equities.

You can either save everything into one Isa, or split it across several, but you can currently only pay into one of each type of Isa each year. From April, Isa savers will be able to pay into more than one of the same type of Isa in the same tax year in a bid to make things simpler for savers and investors.

Here, Telegraph Money takes a look at the different types of Isas to help you decide which options could work best for you. In this guide we will cover: 

Cash Isas are offered by banks, building societies and National Savings and Investments (NS&I).

They function in pretty much the same way as normal savings accounts – the main differences being the restrictions on how much you can pay in, and how you switch to a new account. 

As you can currently only pay into one cash Isa each tax year (though this is set to change from April 2024), if you see a better deal elsewhere after you’ve already started saving, you have to make an Isa transfer – moving all the cash you’ve deposited during the current tax year to the new account. You have to submit an Isa transfer request with the new provider to make this happen.

It’s worth noting that the top cash Isa rates can usually be beaten by their savings account equivalents. There are a few possible reasons for this. According to Moneyfacts, providers have a greater administrative burden of offering Isas (such as reporting to HMRC each year) and may offer lower rates as a result. It could also be that the complexity of Isas puts off some providers, reducing the competition and incentive to make rates more competitive.

This means basic-rate taxpayers can earn up to £1,000 in savings interest in each tax year; reducing to £500 for higher-rate earners. If you pay additional-rate tax, you don’t qualify for this allowance.

Use our savings tax calculator to see how much you’d pay if your cash was held in a savings account, so you can decide whether it’s worth switching to a cash Isa instead.

You’ll have to consider the trade-off between how much tax you could save with an Isa, vs the extra interest you could earn with a savings account.

A stocks and shares Isa can hold a range of investment products, and any investment growth or interest earned within the account is tax-free.

Investments that can be held in a stocks and shares Isa include unit trusts, investment trusts, exchange-traded funds, individual stocks and shares, corporate and government bonds, and Open Ended Investment Companies (OEIC).

Lots of banks offer stocks and shares Isas, along with a host of investment platforms. Depending on how you’re investing, you could expect to pay fees charged by the investment platform or financial adviser, as well as charges levied by individual fund managers if you’re buying funds. These fees will vary depending on the providers you use and the value of your investment.