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Table of Contents
- 1. “You need a lot of money to open an ISA”
- 2. “Once you choose an ISA provider, you’re locked in”
- 3. “An ISA is just a cash savings account”
- 4. “ISAs are the only way to protect your savings from tax”
- 5. “If you don’t use up your ISA allowance, you can carry it into the next tax year”
- 6. Myth: “ISAs are only for adults”
- 7. Myth: “Current ISA rules are set in stone”
More than 22 million adults currently hold at least one Individual Savings Account (ISA) according to HMRC – yet many of us still don’t fully understand how these tax-efficient savings accounts work.
We approached five personal finance experts to share – and dispel – the most common misconceptions they’ve encountered around ISAs to set the record straight.
1. “You need a lot of money to open an ISA”
According to Brian Byrnes, head of personal finance at Moneybox, many savers mistakenly believe you need a large amount of money to open an ISA. And this can be off-putting, especially if you’re starting to save for the first time.
Actually, you can open an ISA with as little as £1, and how much you save thereafter – up to your annual tax-free allowance of £20,000 – is up to you.
Byrnes comments: “By consistently setting money aside, you can take advantage of interest rates and compound growth to maximise your returns. The key is to start early and make saving a habit.”
Many providers, including Moneybox, Monzo and Plum, also allow you to ‘round-up’ the spare change from everyday purchases, and deposit it in an ISA automatically.
Transfers are permitted from a cash ISA into a stocks and shares ISA – and between stocks and shares ISAs – without the transfer counting towards your annual ISA allowance
2. “Once you choose an ISA provider, you’re locked in”
According to research from the investment platform Charles Stanley, almost a fifth (19%) of adults believe that, once you’ve opened an ISA with one provider, you’re locked in forever. But this is not the case.
Charlotte Kennedy, financial planner at Rathbones group, explains: “ISAs have become more flexible over time, and you are always able to transfer to alternative providers.”
That said, if you’ve opened a fixed rate cash ISA, you’ll need to wait until the end of the term before you can transfer the balance – or face an early withdrawal charge.
When you open a new ISA, you will need to complete an ISA transfer form with the new provider if you have an existing balance you want to move over. Simply taking out the cash and paying it into a new ISA without using this process means you will lose the tax-free benefit.
3. “An ISA is just a cash savings account”
In the minds of many savers, ISAs are just another place to put your cash. While this is true, ISA offerings go much further. First, interest earned on cash held in ISAs is paid free of tax.
Second, ISAs aren’t limited just to cash savings – you can also invest in the stock market through a stocks and shares ISA, again with a £20,000 annual limit. Any dividends you earn on shares in an ISA are paid to your account tax-free, while any capital gains you earn by selling investments held in an ISA are exempt from Capital Gains Tax (CGT).
19% of UK adults believe ISAs are only for cash savings.”
– Charles Stanley survey, February 2025
Since, according to Charlotte Ransom of Netwealth, the average ISA holder typically maintains their account for five years or more, many savers who currently hold cash ISAs may benefit from a stocks and shares ISA. That’s because, over five years or more, investing in the stock market tends to produce greater returns than cash savings.
Charlotte Kennedy of Rathbones says: “There is also a risk with holding cash for long periods of time that its value can be eaten away by inflation.”
Just remember that, when you invest, there are no guarantees, and the value of your investments can go down as well as up.
Tax treatment depends on one’s individual circumstances and may be subject to future change. The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of tax advice.
If you want some money for short-term goals of less than five years, stick to cash for that part of it, and use investments for the longer-term ones – so use both cash and stocks and shares ISA accordingly.”
– Rob Morgan, chief investment analyst at Charles Stanley
4. “ISAs are the only way to protect your savings from tax”
In the past, most UK savers paid tax on any interest they earned on non-ISA savings accounts.
But things changed in 2016, with the introduction of the Personal Savings Allowance (PSA). Now, basic rate (20%) taxpayers can earn up to £1,000 in interest each year before tax kicks in. For higher rate (40%) taxpayers, the allowance is £500, while additional rate (45%) taxpayers do not get any PSA.
Thanks to the PSA, many savers are not liable to pay tax on the interest they earn – regardless of whether or not they’re using an ISA wrapper. If your savings account paid interest at 4% AER, for example, you could save up to £25,000 before breaching your PSA.
In other words, if you’re looking to shield your cash savings from tax, you might not need an ISA.
Nick Perrett, chief executive officer of wealth management app Prosper, comments: “I suspect that many people are using ISAs when they don’t need to.
“Pay attention to the interest rate, because if you’re not paying tax anyway, you might be sacrificing a higher interest rate but not actually getting any benefit.”
In the UK, basic rate taxpayers can earn up to £1,000 interest from their cash savings each year without having to pay any tax
Meanwhile, when it comes to shielding your savings from tax, ISAs are not the only option.
If you’re saving for retirement, and don’t plan on touching your money for decades, a Self Invested Personal Pension (SIPP) could be a better fit.
Savers can contribute up to £60,000 to a SIPP each year, and receive tax relief on their contributions (remember that employer contributions count towards this total). In practice, this means for every £80 a basic rate tax payer contributed to their SIPP, the government will add an extra £20 in tax relief.
5. “If you don’t use up your ISA allowance, you can carry it into the next tax year”
According to the experts, many savers are unsure of how their annual ISA allowance works. One key misconception is that if you don’t use the full £20,000 allowance in one tax year, you can ‘carry over’ the unused portion into the following year.
If you don’t use up your annual ISA allowance, you lose it every year. So it’s a good idea to think about ways you can take advantage of your allowance if you can.”
– Charlotte Ransom, chief executive officer at Netwealth
Unfortunately, this isn’t the case. Each tax year, on 6 April, your ISA allowance resets – regardless of how much you paid into ISAs during the previous tax year. In other words, it’s a case of ‘use it or lose it’.
6. Myth: “ISAs are only for adults”
ISAs aren’t just for grown-ups.
With a Junior ISA – or JISA – parents and guardians can save up to £9,000 on behalf of a child each tax year. Just like their adult counterparts, any interest, capital gains or dividends earned through a JISA is shielded from tax.
Nick Perrett of Prosper says: “It surprises me how many people with kids have never heard of a junior ISA.
“A lot of people will be saving for their kids, but if they don’t know that the JISA exists they won’t be doing it in a tax-efficient way.”
According to AJ Bell research, UK children collectively hold around 1.25 million junior ISAs – a fraction of the 22.3 million adult accounts that are currently active.
Two types of JISA are available:
Children can hold multiple JISAs at once, and parents can split the annual allowance between cash and investments however they like.
7. Myth: “Current ISA rules are set in stone”
The ISA wrapper has been around since 1999, and although the basics have remained the same, it has undergone several key changes.
In 2011, for example, the Junior ISA was introduced, opening a new route for parents and guardians to save on behalf of their children. Later, in 2017, the Lifetime ISA entered the scene, with the goal of helping first-time buyers get on the property ladder, and helping individuals save for retirement.
Just last year (April 2024) changes came into effect that allowed savers to open and pay into more than one of each ISA type every tax year – which wasn’t previously permitted.
And further changes could be on the horizon.
In her Spring Statement, Chancellor of the Exchequer Rachel Reeves said the government is considering ISA reforms that aim to help savers “get the balance right” between cash and investments.
Charlotte Kennedy of Rathbones, says: “The Chancellor has indicated that any changes to ISA allowances will be looked at again later in the year, so although ISAs are safe for now we would expect some tweaks in the near future.”
But since nobody has a crystal ball, it’s best to make the most of the current rules, rather than attempting to plan around future regulation.
Brian Byrnes of Moneybox says: “Instead of trying to anticipate policy shifts, it’s best to make informed choices based on your current needs and long-term plans.
“That said, it is always worthwhile doing what you can to maximise your contributions before the end of the tax year to make the most of the annual £20,000 tax-free allowance you are entitled to this year.”
