Do you pay tax on ISA interest?

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Is ISA interest taxed?

No, you do not pay tax on interest earned from an ISA. ISAs are designed to be a tax-efficient way to save and invest money. That means any interest, income or capital gains within the ISA account are tax-free and don’t count towards your Personal Savings Allowance.

This tax-free wrapper applies to both the interest earned on Cash ISAs and also any growth or income gained from Stocks and Shares ISAs. So, whatever type of ISA you choose, any interest you earn is yours to keep. 

If you’re considering investing in ISAs, you just need to make sure you stay within your total annual ISA allowance of £20,000 for Cash ISAs for the 2025/2026 tax year.

However, the allowance is being cut to £12,000 for people under 65 from 06 April 2027, allowing the remaining £8,000 to go into Stocks and Shares ISAs. If you’re aged 65 and over, you’ll retain the full £20,000 Cash ISA allowance.

Do you pay tax on ISA interest from April 2027?

Yes, the Chancellor confirmed the limit on Cash ISAs will be reduced from £20,000 to £12,000 a year from April 2027.

The move was announced in the 2025 Autumn Budget with the aim of encouraging more people to invest in stocks and shares as a viable alternative.

The key changes being introduced in April 2027 include:

• Aged 65 or older: No change, and the £20,000 annual Cash ISA contribution allowance will remain in place.

• Aged 64 or under: Your annual Cash ISA limit will reduce to £12,000. This only applies to new contributions you make from April 2027 and won’t impact Cash ISA savings you’ve previously made up to this point.

• Stocks and Shares ISAs: No change to the annual £20,000 contribution limit to Stocks and Shares ISAs as well as other innovative finance ISAs.

• Total annual ISA contribution: This will remain at £20,000, regardless of age. In other words, you can still contribute £20,000 across different ISAs in one tax year.

• Moving money into a Cash ISA: The change in legislation means you will no longer be able to transfer money from Stocks and Shares ISAs and innovative finance ISAs into Cash ISAs. However, this will not apply to money transferred between Cash ISAs.

• A tax charge will apply to interest paid on cash held in stocks and shares ISAs and innovative finance ISAs: This is designed to prevent cash from being held in these products indefinitely.

If you’re unsure about the most tax-efficient way to invest, speak to a professional financial adviser.

Do you pay inheritance tax on ISAs?

Yes, ISAs can be subject to inheritance tax (IHT) because they form part of your estate when you die. However, IHT is only paid when the total value of the estate exceeds the inheritance tax threshold (nil rate band). The current threshold is £325,000, with 40% inheritance tax usually paid on anything above.

If the ISA is inherited by anyone other than a spouse or civil partner, it could be subject to IHT, depending on the estate’s total value. This means a surviving spouse can inherit the deceased’s ISA as a ‘continuing account,’ allowing them to add its value to their own ISA allowance tax-free. At this point, the ISA becomes part of their own estate for future IHT purposes.

Here is a summary of ISAs and inheritance tax:

Can I protect my ISAs from inheritance tax?

ISAs do not receive any special exemption from inheritance tax, but that doesn’t automatically mean IHT is due when you pass it on after death.

An important IHT exemption is for spouses and civil partners. When wealth is passed on, whether it’s an ISA or other assets, no inheritance tax is payable, making it the simplest way to shield it from tax.

When you pass money on, your spouse can also keep the ISA's tax-free status and benefit from tax-free growth and income for themselves, as long as the money stays within the ISA. That’s in addition to anything they want to contribute towards their own £20,000 annual allowance. Just remember, inheritance tax could apply later when they pass it on.

For beneficiaries other than a spouse, there are generous allowances (nil rate bands) before IHT kicks in. Each individual can usually pass on £325,000 without paying IHT. Spouses and civil partners can also combine any unused allowance when the first partner dies, meaning the surviving partner could pass on up to £650,000 tax-free.

If the estate includes a primary residence being left to children, there’s an extra £175,000 residence nil-rate band per person, as long as the total estate is under £2 million. This extra band can also be passed between spouses. Altogether, this means up to £1 million in assets could potentially be passed on without IHT, including your ISAs if part of the estate.

There are other ways to gift money without it being subject to IHT, but you can’t do this with ISA money while keeping it tax-free. To gift ISA funds, you’d need to withdraw them first, and the recipient could then put them into their own ISA using their annual allowance, which limits how much can be sheltered in ISAs to just their allowance.

Are Junior ISAs exempt from inheritance tax?

In most cases, IHT does not apply to Junior ISAs as the account legally belongs to the child, not the parent or guardian who opened it. Even though a parent or guardian usually acts as the registered contact and manages the account, the funds are owned by the child.

The child gains full access to the ISA account when they turn 18, at which point the Junior ISA converts into a standard adult ISA in their name. As a result, if a parent or guardian passes away, the value of the Junior ISA is not included in their estate and is therefore not considered for IHT purposes.

However, things can get complicated when it comes to contributions. Although the Junior ISA itself sits outside the estate, any money paid into it by a parent is treated as a gift. This means IHT rules on gifting could still apply, depending on the amount contributed and the timing of the contributions.

Do I pay tax on Stocks and Shares ISA withdrawals? 

One of the biggest benefits of Stocks and Shares ISAs, as well as Cash ISAs, is that withdrawals are completely tax-free. Whether you make regular withdrawals, perhaps to supplement a state pension, or take a one-off lump sum, there’s no income tax or capital gains tax to pay.

Additionally, you don’t need to declare these withdrawals on a self-assessment tax return, unlike rental income or interest from savings accounts. That’s another advantage for those who dislike extra paperwork.

That said, Stocks and Shares ISAs aren’t entirely without tax considerations. You don’t get tax relief on contributions like you do with pensions. Also, when you pass away the value of any remaining ISA is included in your estate for inheritance tax purposes.

Do you need more help with tax on ISAs? 

At LV=, our ISAs offer tax-free saving with the potential for long-term growth. If you’d like more information about tax on ISAs and ways to make the most of your money, request a call back today.