How using ISAs saved Brits billions last year

In Cash ISAs, savers are protected from income tax on savings interest. Across the UK, this wrapper saved people £2.79 billion in the 2024/25 tax year, which is more than double the amount saved a year earlier (£1.31 billion) and an impressive 13 times as much as was saved six years prior.

The bumper rates on Cash ISAs during the 2024/25 tax year played a key role. Back in the age of super-low rates, while the economy wrestled with the pandemic, savers were barely making anything on their savings – and in 2021/22 they saved just £75 million in tax on their savings interest. The hiking of rates in recent years has seen that soar.

On a personal level, this means someone with £50,000 in savings, making 4% on them could make savings interest of £2,000 a year. A higher rate taxpayer would pay 40% tax on £1,500 of this – so £600. If they held all of this in ISAs there would be no income tax to pay. Over a period of five years, they could save £3,000 in tax on their savings.

Savings in Stocks and shares ISAs

It has also been a strong period for the markets, creating capital gains for investors that would be heavily taxed if held outside a Stocks and shares ISA. A typical global index tracker fund has grown by 111% since April 2018 (source: FE, Fidelity Index World Inc).

If you had a portfolio of £50,000 outside an ISA wrapper and it delivered 4% in dividends after fees, you’d make £2,000 in a year and a higher rate taxpayer would pay £536.25 in dividend tax. Inside ISA wrappers it would be tax free, so holding this in an ISA for a decade could leave you £5,363 better off. If the same person realised gains of £4,000 a year, outside an ISA that would cost them £240 a year in capital gains tax, whereas inside ISAs it would be tax free. Over a decade they could save £2,400 in capital gains tax too.

How tax is changing

The taxman’s grip on our investments has also been tightening. Capital gains tax rose in October 2024, and dividend tax rates have risen in 2022 and then again in 2026. If that wasn’t harsh enough, the allowances have been slashed too, with the capital gains tax allowance dropping from £12,300 in 2022/23 to just £3,000 in 2024/25 – and the dividend allowance falling from £2,000 to £500 over the same period. Holding investments within the ISA wrapper protects you from both taxes.

Frozen income tax thresholds mean over time, pay rises have pushed taxpayers over thresholds. When you cross into a higher rate tax band your personal savings allowance halves and when you move into paying additional rate tax, it disappears altogether. Once you bust the allowances, you pay a higher rate of tax too. It’s one reason why the tax relief offered by the Cash ISA has been increasingly valuable in recent years.

Crossing a threshold also means you can face a higher rate of tax on dividends and capital gains tax. This ratchets up for capital gains tax when you cross the threshold into higher rate tax. It’s hiked for dividend tax when you move into paying higher rate tax and then again when you move into additional rate tax territory.

Are you taking advantage of these tax-efficient investment methods? 

There has been a great deal of focus on the Cash ISA recently, because the government’s plans to slash the annual allowance for under 65s from next April have persuaded people to stuff their Cash ISAs while they can. It’s hardly surprising: these figures lay bare the tax saving on offer, and demonstrate how painful the lower allowance could make saving in the coming years.

However, these figures also demonstrate how vital it is not to overlook the tax-saving power of the Stocks and Shares ISA too. If you’re considering the best use of your allowance, it’s worth taking time to consider the right balance of investments and savings for your portfolio.