Is ISA Interest Taxable? The Short Answer and the Detail
Updated:
No. gov.uk says you do not pay tax on interest on cash in an ISA, and that you do not need to declare ISA interest on a tax return. Regulations made on 10 September 2026 (SI 2026/1018, regulation 15, read on legislation.gov.uk on 6 October 2026) set a flat rate charge on interest paid or credited on cash held in a stocks and shares or Innovative Finance ISA (other than a Junior ISA, regulation 4), to apply from April 2027; it is not yet in force. Regulation 22A names only cash held under the stocks and shares and Innovative Finance components and does not mention Cash ISAs. Regulation 22A gives no percentage (it says the charge is at the savings basic rate in force for the year); the anti-circumvention factsheet gives 22%. Interest in a normal savings account is different: it can be taxed once your total interest goes beyond the allowances that apply to you. Whether that happens depends on how much interest you earn and on your other income.
The site's rules data was last checked against gov.uk on 26 September 2026. Figures typed in this guide may not yet reflect a later change, and the descriptions of gov.uk pages are summaries that may also lag. The current figures are on the ISA rules at a glance page. General information only, not financial advice.
Is interest in an ISA taxable?
Interest on cash inside an ISA is not taxed. GOV.UK states that you do not pay tax on interest on cash in an ISA, or on income or capital gains from investments in an ISA, and that ISA interest does not have to be reported on a tax return. The GOV.UK guide to Individual Savings Accounts sets this out, and the GOV.UK page on how ISAs work covers the detail.
Two points are worth understanding about what "not taxed" means in practice:
- The pages read for this guide do not say whether ISA interest counts towards the allowances for savings interest outside an ISA, so this guide does not state it.
- gov.uk says you keep your savings on a tax-free basis for as long as you keep the money in your ISA accounts, and that your ISAs do not close when the tax year finishes. The charge described further down, made in law to apply from April 2027, is not yet in force.
That covers interest. It does not mean an ISA can never lose money, and it does not mean the interest rate is better or worse than a normal account. Rates are set by each provider and can change. The tax treatment and the rate are separate questions.
How is interest taxed outside an ISA?
In a normal bank or building society account, interest counts as savings income. Whether you owe Income Tax on it depends on three things: how much interest you earn, your other taxable income, and the allowances you have. The GOV.UK guide to tax on savings interest explains how tax on savings interest works, including the allowances below.
Three allowances can apply to savings interest:
- Personal Allowance. The Personal Allowance is £12,570. gov.uk says every pound of other income above it reduces your starting rate for savings by a pound (see the next item).
- Starting rate for savings. gov.uk says you can get the starting rate for savings if your other taxable income (not including savings interest or dividends) is below the limit on its how much is tax free page. It means you can earn up to £5,000 of interest without having to pay tax on it. Every pound of other income above your Personal Allowance reduces the starting rate by a pound.
- Personal Savings Allowance. This depends on your Income Tax band, as shown below.
| Income Tax band | Personal Savings Allowance |
|---|---|
| Basic rate | £1,000 |
| Higher rate | £500 |
| Additional rate | £0 |
Interest above the allowances that apply to you is taxed at your usual rate of Income Tax: 20% for a basic-rate taxpayer and 40% for a higher-rate taxpayer. Your band is set by your total income, not just by your savings. An additional-rate taxpayer has no Personal Savings Allowance, so all of their interest outside an ISA is potentially taxable.
Many people earn less interest than their allowance, and pay no tax on savings outside an ISA at all. The gap shows up when balances are large, when interest rates are high, or when a higher band cuts the allowance. The allowance applies to the interest you earn over the year, so a small amount from each of several accounts can still add up to more than the allowance that applies to you.
How does the tax on savings interest get collected?
Banks and building societies report the interest they paid to HMRC after the end of the tax year. If tax is due, the GOV.UK page on how you pay tax on savings interest says it is usually collected in one of three ways:
- through Self Assessment, if you already file a return;
- by HMRC changing your tax code, if you are employed or receive a pension;
- through a Simple Assessment letter, if neither of those applies.
gov.uk says a Self Assessment return is needed when your savings interest is above a set amount; the figure is on the page linked above. gov.uk says you do not need to declare ISA interest on a tax return.
A worked example: the same interest inside and outside an ISA
The example below compares one amount of interest earned in two places. All the figures are assumptions chosen to show the arithmetic. They are not taken from any product and are not a forecast.
The assumptions:
- A balance of £10,000 held for one full year with no deposits or withdrawals.
- An assumed rate of 4% a year, paid as simple annual interest. This is an assumed rate, not a forecast.
- The person is a basic-rate taxpayer whose Personal Allowance, starting rate and Personal Savings Allowance have already been used by other interest, so none is left for this balance.
Step 1: the interest earned. £10,000 × 4% = £400. This is the same in both cases, because the tax wrapper does not change the rate a provider pays.
Step 2: inside an ISA. The £400 is free of Income Tax. The person keeps all £400, so the balance at the end of the year is £10,400.
Step 3: outside an ISA. With no allowance left, the whole £400 is taxable at the basic rate of 20%. The tax is 20% of £400. The person keeps the £400 less that tax, so the balance at the end of the year is £10,400 less that tax.
Step 4: the difference. The difference for the year is the tax, 20% of £400. Over a second year at the same assumed rate, the gap would grow slightly, because the ISA balance earns 4% on a larger amount than the taxed balance does.
| Inside an ISA | Outside an ISA (no allowance left) | |
|---|---|---|
| Interest earned | £400 | £400 |
| Income Tax | £0 | 20% of £400 |
| Interest kept | £400 | £400 less that tax |
| Balance after one year | £10,400 | £10,400 less that tax |
The example is deliberately the least favourable case for savings outside an ISA. If the same person had a full Personal Savings Allowance available, the £400 would fall within it and no tax would be due, so the two columns would match for that year. The ISA does not create a benefit here; it protects the interest from tax whatever the person's other income turns out to be. That is why the answer to "is it worth it?" depends on your own income, your balances and the rate on offer.
You can test your own numbers with the Cash ISA calculator and see a side-by-side comparison with the ISA vs savings account calculator.
Does the same apply to a Stocks and Shares ISA or a Lifetime ISA?
Today, yes for cash held inside them: GOV.UK says you do not pay tax on interest on cash in an ISA, or on income or gains from investments in an ISA. It also says a Lifetime ISA can hold cash or stocks and shares, or a combination, and its policy paper on the cash ISA limit refers to cash held within stocks and shares ISAs. From April 2027, regulations made on 10 September 2026 (SI 2026/1018, regulation 15, read on legislation.gov.uk on 6 October 2026) require the account manager (the firm that runs the ISA) to pay HMRC a flat rate charge on interest or alternative finance returns on cash held in a stocks and shares or Innovative Finance ISA (other than a Junior ISA, regulation 4), at the savings basic rate in force for the year (the anti-circumvention factsheet gives 22%). That is made in law, not yet in force. The regulations read for this guide name stocks and shares and Innovative Finance components for this charge and do not mention Lifetime ISAs. The pages read do not say how the charge would apply to money already held, so ask your provider. Our guide to upcoming ISA changes has more.
Two cautions apply. First, money invested in a Stocks and Shares ISA can go down as well as up, and cash held there may earn a different rate from a Cash ISA, or none at all, depending on the provider. Second, a Lifetime ISA has its own rules on what you can take out and when, covered in the next section.
Is money taken out of an ISA taxed? What about the Lifetime ISA charge?
Gov.uk says you can take your money out of an ISA at any time without losing any tax benefits. For most ISAs the practical questions on withdrawals are about the account terms: fixed-term accounts may charge for early access, and only a flexible ISA lets you put back money you have taken out in the same tax year without using more allowance. The GOV.UK page on withdrawing your money explains this.
The Lifetime ISA is the exception people often confuse with a tax. GOV.UK describes a withdrawal charge of 25% if you take out cash or assets for a reason other than those allowed. It is a government withdrawal charge, not an Income Tax on your interest. Where the whole pot is withdrawn, gov.uk says it applies to the total amount in the ISA, including the government bonus, so it can be more than the bonus (see Lifetime ISA withdrawal charge: worked examples). The allowed reasons include buying a first home (with conditions), reaching age 60, and terminal illness with less than 12 months to live. Gov.uk's Lifetime ISA guide also says that if the holder dies, the Lifetime ISA ends on the date of death and there is no charge to withdraw the funds or assets. The GOV.UK Lifetime ISA guide has the full list, including the death case, which appears in the whole-guide version. Our Lifetime ISA calculator shows how the bonus and charge affect a balance.
What can change, and how does this site keep up?
The allowances, tax rates and limits above are set by the government and can change from one tax year to the next. The amount you can pay in is also limited: you can pay up to £20,000 a tax year into your ISAs in total, and that limit is currently fixed until April 2031. The rule figures in this guide are read from the site's rules data, and the date at the top shows when that data was last checked against GOV.UK. Figures in the worked examples are assumptions, not rules. Check GOV.UK for the current position before acting on any figure. You can see the full set on the ISA rules page.
For how rate changes flow through to interest earned, see the impact of interest rates on a Cash ISA. For a wider look at the ISA family, see the different types of ISAs.
What to check with your provider
- Is the account an ISA, or a normal savings account with a similar name?
- Is the interest rate fixed or variable, and for how long?
- Is interest paid into the account, or paid out to another account?
- Can I withdraw money and pay it back in the same tax year (is it flexible)?
- Are there charges or interest penalties for early access?
- How is the interest rate shown: gross, AER or another basis?
Frequently asked questions
Do I have to declare ISA interest on my tax return?
No. GOV.UK says you do not need to declare interest, income or gains from an ISA on a tax return. Interest from ordinary savings accounts may need to be reported, depending on the amount and how your tax is collected.
Does ISA interest use up my Personal Savings Allowance?
The pages read for this guide do not say. gov.uk says you do not pay tax on interest on cash in an ISA; HMRC can confirm how the allowances for savings interest apply in your case.
Do I pay tax when I withdraw money from a Cash ISA?
gov.uk says you can take your money out of an ISA at any time without losing any tax benefits. Your provider may apply its own terms, such as interest penalties on fixed-term accounts, and the annual limit works differently for flexible and non-flexible ISAs.
Is the Lifetime ISA withdrawal charge a tax?
No. It is a government withdrawal charge applied to withdrawals for reasons gov.uk does not list as charge-free, and where the whole pot is withdrawn it applies to the total amount, including the bonus. It is separate from Income Tax on savings interest.
This guide does not constitute financial advice. Your personal situation, tax position, and savings goals may mean different strategies are appropriate. Consider speaking to a regulated financial adviser if you are uncertain.
