Are you missing out on the ISA magic?

Investing within an individual savings account (ISA), like a Stocks and Shares ISA, remains one of the simplest options to reduce tax on your long-term savings. Yet, people could be missing out because of some basic gaps in understanding on how ISAs work and what can go in them.

ISAs are now 25 years old and hold over £725bn of the nation’s savings and investments. Investors can currently shelter up to £20,000 each year in an ISA wrapper, allowing investments within it to grow free from income tax or capital gains tax. There are even 4,850 ISA millionaires – those careful individuals who started early and picked the right options to build an impressive savings pot.

In spite of this success, there is still confusion over what consumers can or cannot do with their ISA. For example, the Charles Stanley Money Milestones survey* found that 29% of respondents believe ISAs are just for cash savings, while a further 15% say they don’t know. In reality, ISAs can be used to hold a variety of investments options, including shares, bonds, funds, investment trusts and ETFs.

In fact, there is an argument that ISAs have even more use as a shelter for stock market investments. Over time, stock market investments would be expected to grow faster than cash. The S&P 500, which is a basket of the 500 biggest US-listed companies, for example, has seen an annualised return of 11.3% to UK investors over the past decade. This is also true for income available from stock market dividends. This means people could be saving more tax in a Stocks and Shares ISA than through a Cash ISA.

Multiple ISA Accounts

There are also other areas that are poorly understood. For example, 28% of consumers think that you can only have one ISA at a time, while 31% believe an ISA is the only tax-efficient savings vehicle you can hold. In reality, you can hold multiple ISAs at one time, including with different providers and investment platforms, and across cash ISAs and stocks and shares ISA, subject to the overall annual limit, currently £20,000 for the 2025/2026 tax year. You can also transfer ISA account(s) to a new provider. Equally, ISAs can sit happily alongside pensions and general investment accounts.

There was also confusion about the flexibility of an ISA. This is important because one of the main advantages of an ISA over, say, a pension, is that investors are not tied in and can add or withdraw money at any time. Our study found that 22% of people believe you can't take money out of an ISA. In fact, you can take money out whenever you like. There are even some ISAs that will let you withdraw money and put it back within the £20,000 limit. Our Flexible Stocks & Shares ISA allow you to manage your savings more dynamically, accessing funds when needed and replacing them later without affecting your annual ISA allowance.

It’s important to note, ISAs, particularly Stocks & Shares ISA, are designed for saving for the long term so making regular withdrawals can be counterproductive towards your financial goals. However, the option to withdraw is there if you really need to access the money.

The one exception to this flexibility rule is the Lifetime ISA. This operates a little like a hybrid between a pension and an ISA. You get a government bonus of 25% on contributions up to £4,000 each year, plus the usual benefits of an ISA wrapper, but the money must be used towards buying your first home or for saving for retirement. If you withdraw it before then, or for any other reason apart from terminal illness, you’ll pay a withdrawal charge of 25%.

Taxation confusion

A quarter of people believe you get taxed on any interest earned within an ISA. The beauty of an ISA is that all income – whether from interest on cash savings or from bonds, and dividends from shares – is tax free. Unlike a pension, there is no tax relief, but ISAs are a compelling option to create a long-term tax-free income stream.

Other areas of misunderstanding are around ISA limits: 21% believe you have to use your full ISA allowance in order to qualify for one. ISAs have different minimum investment levels, but they can be as low as £50 if you invest monthly by direct debit and are certainly nowhere near the £20,000 ISA limit. However, you need to make the most of your ISA allowance each year. While 40% believe you can top up your ISA allowance from previous years’ unused contributions, you can’t. ISA allowances operate on a use-it-or-lose it basis.

Please note, tax rules can change and certain tax benefits may vary depending on your personal circumstances and tax situation.

The bottom line

These misunderstandings may explain some of the reluctance to invest in ISAs. For example, of those who do not have an ISA, 42% of respondents say it is because they want to access their money easily. Better understanding of the flexibility of ISAs may also help investors overcome some of their reservations.

Equally, 23% don’t have an ISA because they don’t feel they have enough money saved up to need one, while 14% don’t have an ISA because they are focused on pension savings. In reality, both pensions and ISAs have a place as part of longer-term savings and investors don’t need a lot of money to access either one.

ISAs remain a straightforward, flexible option to manage your money. Investors are not just confined to cash saving options, but can use ISAs to hold stocks and shares, bond or alternative investments like property and commodities. Correcting some basic misunderstandings about how they work may encourage even more people to discover their benefits.

Learn more about Stocks and Shares ISAs

*The research was conducted by Censuswide, among a sample of 3,001 ‘mass affluent’ consumers, aged 18+ (defined as those earning above the UK average pre-tax salary (£33,000) AND with at least £1,000 in accessible cash/savings). The data was collected between 14.02.2025 - 21.02.2025.