The short answer
- Use your £20,000 ISA allowance first: everything inside is free of Income Tax and Capital Gains Tax.
- A GIA pays tax once dividends exceed £500, interest exceeds your savings allowance, or gains exceed £3,000.
- The ISA advantage grows each year because tax paid in a GIA no longer grows.
- From April 2027, under-65s can only put £12,000 a year into cash ISAs, but the overall limit stays at £20,000.
ISAs and general investment accounts
- Dividends
- Tax-free
- Interest
- Tax-free
- Gains
- Tax-free
- Limit
- £20,000 a year
- Reporting
- None
- Dividends
- Taxed above £500
- Interest
- Taxed above your allowance
- Gains
- Taxed above £3,000
- Limit
- None
- Reporting
- May need a tax return
The three taxes a GIA pays
| Income | Tax-free | Basic rate | Higher rate |
|---|---|---|---|
| Dividends | £500 | 10.75% | 35.75% |
| Interest | £1,000 / £500 | 20% (22% from 2027) | 40% (42% from 2027) |
| Capital gains | £3,000 | 18% | 24% |
Dividends and interest are taxed every year, even if you reinvest them. Gains are taxed when you sell, including when you switch funds or rebalance.
How much an ISA saves
Our example invests £20,000 now and £500 a month for 20 years, with 4% growth and a 2% dividend yield, for a higher-rate taxpayer earning £55,000, selling at the end.
| Taxpayer | ISA | GIA | ISA advantage |
|---|---|---|---|
| Basic rate (£30,000) | £297,889 | £278,154 | £19,736 |
| Higher rate (£55,000) | £297,819 | £262,603 | £35,216 |
| Additional rate (£150,000) | £297,819 | £260,716 | £37,103 |
The higher-rate investor’s GIA pays £17,018 in tax along the way and £12,015 of Capital Gains Tax at the end. Without selling, the advantage is still £23,481.
Why the gap grows over time
Every pound of tax paid in a GIA is a pound that stops growing. Over 30 years the advantage reaches £118,908, more than half of the £200,000 invested.
Income, bonds and growth
The more income an investment pays, the more an ISA saves. A 4.5% dividend yield with 2% growth gives a higher-rate taxpayer a £59,707 advantage over 20 years in our example. A bond fund paying 4.5% interest gives £46,849, because interest is taxed at income tax rates.
Hold income in the ISA
If you have both accounts, keep high-yield shares, bond funds and cash-like investments in the ISA, and low-yield growth investments in the GIA.
The £20,000 allowance
You can put up to £20,000 a year into ISAs, split between cash, stocks and shares, innovative finance and Lifetime ISAs (up to £4,000 in a Lifetime ISA). The allowance resets on 6 April and unused allowance is lost. With £100,000 to invest at once, only £20,000 can go into an ISA in year one, so the ISA advantage in our example falls to £14,462 unless you move more in each year.
Changes from April 2027
- 6 April 2027Cash ISA limit £12,000
For savers under 65. The rest of the £20,000 must go into other ISA types.
- 6 April 2027Savings tax rises
Rates on interest go to 22%, 42% and 47%.
- OngoingAllowances frozen
The £20,000 ISA limit has not changed since 2017.
Types of ISA
| ISA | Holds | Notes |
|---|---|---|
| Cash ISA | Savings | £12,000 limit for under-65s from April 2027 |
| Stocks and shares ISA | Shares, funds, bonds | Most flexible for long-term investing |
| Lifetime ISA | Cash or investments | Up to £4,000 a year, 25% bonus, for a first home or age 60 |
| Innovative finance ISA | Peer-to-peer loans | Higher risk |
| Junior ISA | For under-18s | Up to £9,000 a year, separate from your allowance |
Bed and ISA
“Bed and ISA” means selling investments in a GIA and buying them back inside your ISA. It uses your ISA allowance and may trigger a gain, so do it within the £3,000 exempt amount if you can, or spread it over several years. Most platforms do it in one transaction, with little time out of the market.
Which account to fill first
- Take any employer pension match: it is free money.
- Keep an emergency fund in easy-access savings.
- Use a Lifetime ISA if you are buying a first home or saving for later life and are under 40.
- Fill your ISA allowance.
- Consider extra pension contributions, especially as a higher-rate taxpayer.
- Use a GIA for anything beyond that, and move it into ISAs each year.
When a GIA still makes sense
- You have used your full ISA allowance.
- You need to hold assets not allowed in an ISA.
- You want to give away or transfer investments, for example to a spouse, which is simpler from a GIA.
- You expect losses you want to set against other gains, which only works outside an ISA.
How the comparison works
The calculator follows the same money through both accounts. In the ISA plan, up to £20,000 a year goes into the ISA and anything above that into a GIA. In the GIA plan, everything goes into a GIA. Each year, the GIA pays Income Tax on dividends and interest at your rates, after the dividend allowance and Personal Savings Allowance. A share of gains is taken each year, to reflect fund switches and rebalancing, and taxed after the £3,000 exempt amount. Income is reinvested after tax. At the end you can choose to sell everything.
Tax rates and allowances are held at 2026/27 levels, apart from the optional 2027 savings rates. In reality allowances may change, which is one more reason to use the ISA while you can.
Frozen allowances and fiscal drag
The ISA allowance has been £20,000 since April 2017, while the dividend allowance has fallen from £5,000 to £500 and the Capital Gains Tax exempt amount from £12,300 to £3,000. As wages and investment values rise, more investors pay tax outside an ISA each year. Income Tax thresholds are frozen until 2031, which also pulls more people into the higher-rate band, where the ISA saves most.
Couples: two allowances
Each adult has their own £20,000 ISA allowance, so a couple can shelter £40,000 a year. Gifts between spouses and civil partners are free of Capital Gains Tax, so one partner can give money or investments to the other to use their allowance. If one of you pays a lower rate of tax, holding the GIA in their name reduces the tax drag on anything outside the ISAs.
Flexible ISAs and withdrawals
You can take money out of a stocks and shares ISA at any time. With a flexible ISA, you can put money back in the same tax year without it counting towards your allowance. Most stocks and shares ISAs are not flexible, so a withdrawal permanently uses up that part of the allowance. Check the terms before taking money out.
Transferring ISAs
You can move an ISA to another provider without losing its tax-free status, as long as you use the provider’s transfer process. Do not withdraw the money yourself, or it loses its ISA status and uses up allowance when you put it back. Transfers can take several weeks, and some providers charge exit fees.
ISA or pension?
- Going in
- No tax relief
- Coming out
- Tax-free, any time
- Best for
- Flexible goals and early retirement
- Going in
- Tax relief at your top rate
- Coming out
- 25% tax-free, rest taxed, from age 57 (from 2028)
- Best for
- Retirement, especially for higher-rate taxpayers
For many people the answer is both. The pension tax relief calculator shows how much a pension contribution really costs you.
Charges and platforms
ISA and GIA charges are usually the same on any one platform, which is why the calculator leaves them out. Platforms charge either a percentage of your investments or a flat fee, and fund managers charge an ongoing fee. Over decades, a difference of 0.5% a year in charges can matter as much as the tax saved, so compare both.
Junior ISAs
A Junior ISA lets parents, grandparents and others save up to £9,000 a year for a child, tax-free. The money belongs to the child and can only be taken out at 18. Because the parental £100 income rule does not apply, it is usually the best way for parents to invest for children.
ISAs, death and inheritance
On death, an ISA remains tax-free while the estate is dealt with, for up to three years. A surviving spouse or civil partner gets an additional permitted subscription equal to the ISA’s value, on top of their own allowance. But ISAs are part of the estate for Inheritance Tax, unlike unused pensions before April 2027.
Scottish taxpayers
Scottish taxpayers pay UK rates on dividends, savings and gains, so a GIA is taxed in the same way as in the rest of the UK. But Scotland’s higher Income Tax rates on salary can push more income into the higher-rate band for savings and dividends purposes, making an ISA slightly more valuable.
Common mistakes
- Leaving the ISA allowance unused, especially in years with spare cash.
- Holding cash in a stocks and shares ISA for years when it could be invested.
- Withdrawing from a non-flexible ISA and losing the allowance.
- Paying more than £20,000 into ISAs in one year, which HMRC will correct.
- Ignoring the tax on accumulation units in a GIA.
Lifetime ISA in more detail
A Lifetime ISA can be opened between 18 and 39. You can pay in up to £4,000 a year until 50, and the government adds a 25% bonus, up to £1,000 a year. The money can be used for a first home costing up to £450,000, or taken from 60. Other withdrawals face a 25% charge, which takes back more than the bonus. The £4,000 counts towards your £20,000 overall ISA allowance.