Explainer: what is an ISA – and how can they help families to save?

ISAs were introduced to help people save efficiently for their future. They are flexible and give you options, and can also help families to supercharge their savings by making the most of the tax advantages.

What is an ISA?

An individual savings account (ISA) offers a tax-efficient way to save money and invest, so you can view an ISA as a tool (typically called a wrapper) to shelter your cash and investments from tax. No matter what rate of tax you pay, when you invest your money in an ISA, it is tax efficient when compared to a general investment account.

Each tax year the government sets an allowance that an individual is allowed to contribute to an ISA. All capital gains made and income received within the ISA are then tax free.

How much can I invest in an ISA?

The allowance for the 2025/26 tax year is £20,000. You can contribute up to this amount into either a Stocks & Shares ISA, Cash ISA and Innovative Finance ISA. It is possible to split the allowance between the different types of account, but you can only invest £4,000 a year into a Lifetime ISA. Netwealth offers a Stocks & Shares ISA.

ISA allowances don't roll over to the next tax year if unused. Therefore, it is important to use as much of your allowance as possible each year (we can automate this for you – to save you the trouble and to help you ensure you stay on track).

Who is eligible to open a Stocks and Shares ISA?

To qualify for a Stocks & Shares ISA allowance you must be a UK tax resident over the age of 18. Under 18s are eligible for a JISA (or Junior Stocks & Shares ISA) and their allowance is £9,000 a year.

How are my investments taxed within an ISA?

Any gains made by selling investments within your Stocks and Shares ISA are not subject to capital gains tax. Equally, any losses made on your investments in your Stocks and Shares ISA can’t be used to offset capital gains made on other investments held in a taxable account.

Investments that pay interest (eg, government and corporate bonds), or rental income (such as some property funds) provide 100% tax-free income if held within an ISA and therefore offer tax benefits for everyone.

Income can also come in the form of dividend payments. The way these payments are taxed was changed for the start of the tax year 2016/17 and they are now 100% tax free when held within an ISA wrapper.

ISAs – an ideal long-term solution for families

Because the benefits of savings and investing accrue over time (due to the power of compounding) the benefits of an ISA also become more evident over the longer term.

Your main consideration when growing your wealth is whether to choose a cash ISA or a stocks and shares ISA. Having money in cash savings can be adequate for the short term, but if you truly want to grow your money for the future, cash-based accounts will unlikely work hard enough to combat the ravages of inflation.

We illustrate the shortfall in this article – which makes a very compelling case for putting your money to work.

So let’s examine how investing in stocks and shares is further enhanced within a tax-efficient wrapper of an ISA compared to a general investment account (GIA), where there are no tax breaks.

Take a family of four: with each adult allowed to put £20,000 a year into an ISA, and each child allowed £9,000 a year, the family can shelter £58,000 each year from the taxman. Not surprisingly, this sizable sum can lead to a substantial pot of money in ten years – and the tax-free benefits of ISAs come into their own.

Let’s first look at how £58,000 a year would accrue if invested in a Netwealth Risk Level 7 portfolio through a general investment account and subject to a higher-rate tax. This would build up to £702,757 after 10 years in the average scenario.

Simulated historic and future performance numbers should not be relied upon as an indicator of future performance.

Conversely, if £58,000 a year is subscribed to ISAs for a family group each year, the sum invested could attain £816,753 after 10 years, in an average scenario. In only 10 years, utilising the ISA allowances would result in an increase of £113,996 in the end portfolio values, as shown below:

Simulated historic and future performance numbers should not be relied upon as an indicator of future performance.

Remember, even if you exceed your tax-free allowances, it’s still better to invest the rest. Some families may find they have cash to spare after they exceed their ISA and JISA limits. While it may be tempting to place that extra money in the safe confines of a bank deposit account, this apparent security is an illusion – as mentioned above, it’s better to put your money to work, even outside of a tax wrapper.

Your next step

ISAs can be a valuable way for individuals and families to set up a regular saving plan – and through the power of compounding and tax efficiency, generate a considerable sum a few years later.

Assembling the constituent parts within an ISA (whether through company shares or investment funds) in an efficient and considered manner is also crucial. This is where an investment philosophy driven by a deep understanding of the market, cutting edge technology and competitive pricing can really make a difference.

Deciding how much investment risk you should take to achieve your goals is a good first step – then to find out more about how we can help, please get in touch.

Please note, the value of your investments can go down as well as up.

Netwealth offers advice restricted solely to our services. We do not consider the whole of the market, nor offer advice in relation to tax compliance, insurance products, or the transfer of defined benefit pensions.