25 years of ISAs – how much could an investor have made tax free?

It’s a happy 25th anniversary for ISA investors on the 5^th April! Since their introduction, an investor could have contributed over £325,000 to these valuable tax efficient allowances by utilising the maximum available each tax year.

If someone were able to do so, they would have needed a growth rate of about 9.8% a year to reach the magic £1m today. This would only have been achievable through taking a high, and possibly unrealistic, level of risk. The average annual return from global equities over that period is 7.2%, although past performance is not a reliable guide to the future.

While joining millionaires’ row from ISAs alone hasn’t quite been possible, some older investors have managed it, generally through utilising the forerunners to ISAs, personal equity plans (or “PEPs”), which began in 1987. PEPs were later merged into ISAs.

Yet building a substantial tax-free pot has still been achievable through patiently staying the course and consistently contributing as much as possible to ISAs. Here’s how much could have been accumulated in this tax-free wrapper by investing the full allowance each year since they were introduced.

Chart: Total ISA value after investing full allowance each tax year from 1999/2000 to 2024/25

Utilising ISAs allowances in full since 1999 you could have invested £329,560 bit by bit over the course of 25 years. Meanwhile, achieving an annual return of 7%, similar to the average returns from global shares, would have seen your tax efficient pot grow to as much as £704,849.

It involves taking risk to generate this kind of return, which is why ISAs are often better used over the long term to house investments rather than cash. Cash can be an important part of your overall wealth strategy, especially for short-term savings that need security of capital, but it tends to produce lower returns. Investments can also fall as well as rise – especially over shorter periods.

Why is an ISA an investor’s friend?

Simple, flexible and tax efficient, Stocks & Shares ISAs stand out as a home for investments, offering you freedom to invest how you choose.

A Stocks & Shares ISA is an investment account that allows you to shelter money from tax (up to £20,000 per year) and invest in shares, funds, investment trusts and more. Vitally, any returns you make on your investments are completely tax-free.

As high inflation risks eroding the value of cash in the UK, investment ISAs serve as a popular alternative to the more commonly known Cash ISAs. Simply put, a Stocks & Shares ISA will give your money the chance to grow faster than inflation through returns or gains on your investments. Think of them as a wrapper around your investments that prevents bites being taken out by tax, so you get to keep more of your returns.

Your ISA allowance resets on 6th April each year with a fresh £20,000 to save or invest. If you have cash available at this point, and you know you can spare it, you can consider putting that to work to make your finances as tax efficient as possible.

How do you maximise the potential of ISAs?

The size of any portfolio is a function of two things: how much is put in and the return generated. With many demands on our money, it may not be realistic for many people to use their full ISA allowance each year, but the more you save and the earlier you do so the better.

To maximise the potential of ISAs it’s usually best to stick out tough times, stay invested and keep adding. As a patient investor with a long-term horizon time is on your side. Leaving money untouched and reinvesting returns is crucial to allowing the magic of compound interest – earning interest on your interest – to take effect.

Being too reactionary and trading in and out of the stock market over the short term can be unwise – even if political or economic reasons seem compelling. Not only are outcomes unpredictable, but so are their effects on financial markets.

How has the ISA allowance changed?

ISAs have changed a lot over the years. When they were introduced in 1999 the limit for a Stocks & Shares ISA was £7,000. Alternatively, you could have two ‘mini’ ISAs, one for shares and one for cash, of £3,000 each. Today you can split a larger allowance of £20,000 in the proportion you want between the ISA types. The allowance has been £20,000 since 2017/18.

ISA allowances over the years:

The value of investments can fall as well as rise. Investors may get back less than invested. Past performance is not a reliable guide to the future.

Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus.