9 reasons to take advantage of your 2025-26 ISA allowance this tax year

Why tax efficiency matters right now?

Rules governing cash savings in Individual Savings Accounts (ISAs) are set to change from April 2027, with Cash ISA contributions for under-65s capped at £12,000 each tax year and additional measures planned to deter holding cash balances within Stocks & Shares ISAs, though the final details on the latter are still being ironed out.

Importantly, subscriptions made this financial year (2025-26) or next (2026-27) still fall under the existing framework.

Tax efficiency has rarely mattered more. Chancellor Rachel Reeves’ decision in the recent Autumn Budget to extend the freeze on income tax thresholds until April 2031 will gradually pull millions more into higher tax bands as wages rise. The Budget also set out 2-percentage point increases in tax rates on dividends from April 2026 for basic and higher rate tax payers, with the additional rate remaining unchanged. Tax rate on savings interest and property rental income will also rise from April 2027, for basic, higher and additional rate tax payers.

ISAs, including Stocks & Shares ISAs, allow savers to grow wealth and generate income without a punitive tax bill - vital in these taxing times. But they come with a hard deadline –fail to use some, or all, of the allowance by midnight on April 5 and it cannot be carried forward. 

This deadline is particularly significant this financial year as there is still time to maximise allowances and move assets across before the hikes to tax on dividends and interest come in.

Since their launch in April 1999, ISAs have undergone repeated tweaks and in November Reeves announced further changes designed to encourage more savers to invest. The move against cash savings in ISAs has attracted widespread criticism, as it will increase complexity without delivering a meaningful boost to long-term investing. Questions also remain around the future of the Lifetime ISA (LISA), which is set to be replaced by a new product aimed at first-time buyers – though LISAs can still be opened and topped up under the current rules. 

Against this backdrop, the key message for savers this tax year is simple: ‘it’s business as usual’. Rather than reacting to speculation about future tweaks, savers and investors should focus on what they can control today. Making optimal use of this year’s £20,000 ISA allowance – and next year’s - helps ensure income and gains are sheltered from an increasingly hungry tax system.

As the countdown to tax year end begins, here are nine reasons to take advantage of your 2025-26 ISA allowance in its current form before it expires at midnight on April 5:

1. Your savings are sheltered from tax year after year

Savers and investors are facing a barrage of tax increases, making ISAs one of the most powerful – and vital – wealth protection tools available. Money or investments held within an ISA are sheltered from tax on income and capital gains year after year, which is particularly valuable given the sharp cuts in the dividend allowance and capital gains exemption in recent years, alongside higher Capital Gains Tax rates since November 2024, the static Personal Savings Allowance, the extension of frozen income tax thresholds until April 2031 and the looming rises in income tax on dividends and savings interest. 

Even if you cannot contribute the full £20,000 before the tax year ends, using as much of the allowance as possible - or transferring assets held outside tax wrappers – can materially reduce further tax erosion over time. No one wants to pay tax on money they have already been taxed on, which is why ISAs should be at the top of financial to-do lists this tax year end.

Tax pressures on savings and investments include:

• The annual Capital Gains Tax (CGT) exemption was cut to £3,000 in April 2024, where it now remains - less than a quarter of the £12,300 available in 2022-23. In Autumn 2024, CGT rates on investment gains rose to 24% for higher rate taxpayers and 18% for basic rate taxpayers – up from 20% and 10% respectively. Taken together, these changes mean investors with assets held outside a tax wrapper will burn through their more modest CGT exemption far more quickly than in the past, increasing the likelihood of any realised gains attracting a tax bill.
• The annual dividend allowance was slashed to a paltry £500 in April 2024 - a mere tenth of the £5,000 it stood at in 2016-17 tax year. How much you pay depends on your income tax band. Under current rules, basic rate taxpayers have a dividend tax rate of 8.75%, while for higher rate and additional rate taxpayers it’s 33.75% and 39.35% respectively. Following the Chancellor’s most recent Budget, there will be a rise to 10.75% for basic rate taxpayers and to 35.75% for higher rate taxpayers from April this year. The additional rate will remain unchanged. Remember, dividends earned from shares or funds held within an ISA are not taxable, highlighting the value of holding income-generating assets within an ISA.
• The Personal Savings Allowance (PSA), the amount of interest earned outside of ISAs and pensions that can be received tax-free, has been frozen since inception in 2016 with basic rate taxpayers entitled to £1,000 tax-free interest and taxpayers subject to the higher 40% income tax rate having a £500 allowance. Additional rate taxpayers earning above £125,140 subject to 45% income tax, have no concession at all.

Millions more people are already paying tax on savings interest - a result of those frozen income tax thresholds and that static PSA – figures that will accelerate from April 2027 when savings tax rates rise by 2 percentage points to 22% for basic rate taxpayers, 42% for higher rate taxpayers and 47% for additional rate taxpayers.

2. You can use this year’s full allowance for cash or investments – or both 

Current ISA rules come with the flexibility to save the full allowance in either cash or investments – or a blend of both. This tax year, savers can split their £20,000 ISA allowance across different types of ISA, whether that’s a Stocks & Shares ISA, a Cash ISA, a Lifetime ISA (up to £4,000 for those who qualify) or an Innovative Finance ISA.
 
That flexibility will narrow from April 2027 when subscriptions to Cash ISAs will be capped at £12,000 for under-65s. The ability to sidestep that rule by holding cash inside a Stocks & Shares ISA – a workaround currently permitted - will also change. For those under 65, HMRC has pledged to ban transfers from Stocks & Shares ISAs to Cash ISAs, apply a charge on interest earned on cash held in investment ISAs and curb access to investments deemed ‘cash like’, which may remove access to money market funds. These proposals, alongside the new Cash ISA cap itself, have prompted several post-Budget discussions between policymakers and providers as the finer details are worked through. 

One option reportedly under consideration is a flat rate charge on interest earned on cash held within Stocks & Shares ISAs, with some reports it would be a rate of 22%, similar to the 20% charge applied to cash held in investment ISAs prior to July 2014, The latter went largely unnoticed due to the ultra-low interest rates at the time and with many ISA providers paying no interest at all. Applying a charge now would be felt, both due to higher Bank of England rates and much improved terms from ISA providers following regulatory pressure. A charge for holding cash would seem to be a barely disguised tax and goes against the tax-free promise of ISAs. Occasional cash holdings are perfectly normal in Stocks & Shares ISAs, representing money awaiting investment, dividend distributions and temporary positions to reduce risk in times of turbulence. 

Separately, replacing the Lifetime ISA (LISA) with a simpler alternative has merit as its dual purpose – supporting first-time buyers and boosting retirement savings – has long created complexity. Restrictive purchase rules, including the £450,000 cap on the value of a qualifying first home, have been problematic for some prospective buyers, particularly in London and the South East. For now, however, LISAs can still be opened and topped up under existing rules, which can be lucrative as there is the opportunity to secure a maximum £1,000 annual uplift - 25% of their contribution.

Savers can also access peer-to-peer lending through an Innovative Finance ISA (IFISA), allowing people to lend up to £20,000 to borrowers or businesses free from tax. From April, cryptocurrency exchange traded notes will theoretically be available within IFISAs should any providers choose to offer access to them.  However, it should be noted that IFISAs are not protected under the Financial Services Compensation Scheme. 

While some savers may be tempted to maximise their Cash ISA entitlement before the new rules take effect, it’s worth remembering that investments, especially equities, have historically delivered higher real returns than cash over longer periods, though can be volatile over the short-term. Past returns cannot be guaranteed in the future.

That said, investing is not suitable for everyone and there are risks meaning you may not get back all you invested. Investors typically need a time horizon of at least five years to ride out market ups and downs, and there are periods when holding cash makes sense – such as planning a short-term financial goal such as clearing a mortgage. But leaning too heavily on cash for the long-term risks missing out on the inflation-beating returns that well-diversified investments have typically delivered over time.  

3. You can open and contribute to multiple ISAs of the same type 

With choice can come greater complexity. It is only since April 2024 that savers have been able to contribute to more than one ISA of each type per tax year – with the exception of Lifetime ISAs and Junior ISAs. Before that change, savers could only contribute to one ISA of each type per financial year.  
  
The rule change may have proved useful for cash savers who want to use more than one provider or hold different ISAs for different financial goals, as well as shop around for the best rates, though there is scant evidence of how many have done so in practice. The Stocks & Shares ISA market has long been dominated by platforms, like Bestinvest, that offer choices from thousands of investments and hundreds of providers, meaning less reason to contribute to multiple accounts.  

That flexibility may narrow in the future with the Cash ISA change, but this tax year the rules are simple, open and pay into as many ISAs as you want to – just be careful not to breach the £20,000 allowance limit.  

Just remember, spreading money across different ISAs increases the risk of losing track of contributions and accidentally breaching the limit.  Savers should not assume errors will go unnoticed as ISA providers are required to report all ISA subscriptions to HMRC at the end of the tax year.  

If an oversubscription has occurred this tax year, alert your ISA provider and ask them to remove the overpayment and correct the error. If the breach relates to a previous tax year, wait for HMRC to contact you to advise you of the next steps or reach out directly for guidance.  

4. You can load your Stocks & Shares ISA with cash before tax year end and invest later 

Those opting for a Stocks and Shares ISA this tax year don’t need to rush into investment decisions simply to beat the deadline. While charges may apply to interest held in Stocks & Shares ISAs in the future, for now, you can add money as cash first and decide how to invest it later.  

Building an investment portfolio from scratch can be daunting, particularly with the pressure of a looming tax year end. Being able to secure an ISA allowance with cash initially, then invest once you’ve had time to consider your options – can remove stress and enable investors to make confident, well-informed decisions.  

At Bestinvest, we pay interest on cash balances awaiting investment, meaning money won’t sit idle while investment choices are finalised.

Check the latest cash interest rate paid at Bestinvest

If you’re looking for some investment inspiration, check out our Best™ Funds List or browse our range of Ready-made Portfolios. You can also book a free session with a Coach who can guide and educate you on fundamental investing principles, help you understand the investing landscape and your attitude to risk as well as inform you about the range of investments we offer.

5. Flexibility remains your friend this tax year, except for LISAs 

Alongside the ability to invest in a wide range of assets, most Stocks & Shares ISAs and easy-access Cash ISAs offer flexibility. Savers can withdraw money and replace it later in the same tax year without the replacement counting towards their annual ISA allowance.

Is the Bestinvest Stocks & Shares ISA flexible? Yes.

This makes ISAs an effective tool for a variety of savings goals, as they can function like a pot you can dip into whenever needed. This feature may be more useful for Cash ISAs, though most Stocks & Shares ISAs currently allow people to hold cash awaiting investment.    
Remember, this flexibility does not extend to LISAs. Withdrawals before the age of 60 - or for anything other than a first property purchase - trigger a 25% penalty on the full amount withdrawn. 

6. You can invest regularly – and reap the rewards

You don’t need to deposit a large lump sum to start investing in an ISA, after all very few people have £20,000 spare in one go. Instead, savers can make regular contributions either on an ad hoc basis or through regular deposits – such as via monthly Direct Debits.  

Regular investing can be appealing for the less confident, who may be reticent about putting a large sum of cash to work at a single point in time, especially if markets are volatile. By choosing a contribution level and investments aligned to their risk appetite and financial goals – much like workplace pension saving – investors can ease themselves into the market in a more measured way. 

Contributing regularly rather than sporadically can also help build discipline and encourage long-term saving habits, and it removes the emotion from investing. Keeping track of daily market movements can feel overwhelming, especially for newer investors. Investing monthly harnesses the benefits of pound-cost averaging, where money is invested at regular intervals regardless of market conditions which could help smooth out the impact of short-term volatility.

At Bestinvest, you can set up an automatic monthly investment into your favourite funds online or via the app from just £50. Money is collected from your linked bank account via Direct Debit around the 25th of each month.

For DIY investors that want an active approach but prefer to remain hands off, Ready-made portfolios, can be a smart solution. These off-the-shelf, one stop shop investment products allow DIY investors to rely on experts to build a diversified portfolio tailored to their risk level with ongoing monitoring and rebalancing. These can be invested predominantly in actively managed funds, or low-cost passives. This means instead of spending time and effort picking out the right mix of stocks, bonds and funds to build a coherent investment strategy picking the right asset allocation mix, you can let the experts do the heavy lifting for you.

7. Children benefit from the tax perks of an ISA too  

While adults can save up to £20,000 per tax year in an ISA, children are eligible for their own tax-free wrapper in the form of a Junior ISA (JISA) with an annual allowance capped at £9,000. Junior ISAs are a popular way for parents to build tax-efficient savings and investments for a child.  

The tax benefits mirror those of an adult ISA – with no capital gains or income tax. Funds become accessible once the child turns 18 at which point the pot effectively converts into an adult ISA. That makes JISAs useful to cover future costs such as university fees or a first-home deposit. Don’t forget that only the child can access the money at 18, so families should consider the implications of this when contributing. 

Parents can either choose to open a Cash JISA or Stocks & Shares JISA depending on their time horizon and attitude to risk. One additional advantage is that JISAs sidestep the parental tax rules. If a child earns more than £100 in interest on money gifted by a parent and held in a regular savings account, that income is taxed as if it were the parent’s - an issue that does not apply to JISAs. Parents should tread carefully, however. There’s no point topping up a JISA if they might require the money for their own needs, because they can’t get it back. 

At Bestinvest, we only offer a Stocks & Shares JISA.

8. Couples can double up on their ISA allowance, stashing up to £40,000 in a single tax year

Married couples and civil partners benefit from a tax advantage not available to co-habiting couples: the ability to make ‘interspousal transfers’. This is where savings and assets can be moved to a spouse, who may be subject to lower rates of tax, without triggering a tax charge.    

This enables couples to make use of two sets of allowances – such as the Personal Savings Allowance, dividend allowance and capital gains exemption, as well as two ISAs. For married couples looking to reduce their overall tax exposure, money earmarked for investing can be shuffled between them without flagging the interest of HMRC – particularly useful if one partner has exhausted their allowances and the other hasn’t. There is the potential for a couple to shelter up to £40,000 within ISAs in a single tax year. Remember, the receiving partner becomes the full, legal owner of those assets, so consider this carefully if the relationship is less than rock solid.

9. Don’t have upfront cash to invest? Transfer existing investments using ‘Bed & Isa’

Not everyone has spare cash available to invest before tax year end, but many investors hold shares or funds held outside a tax wrapper - either as share certificates or within a General Investment Account - that could benefit from being moved into a tax-free ISA.    

To beat shrinking tax allowances, investors can sell those holdings and repurchase them within an ISA using a process known as ‘Bed and ISA’. While CGT may be due on gains realised above the annual exemption at the point of sale, sheltering the assets within an ISA means any future income or gains are preserved from tax. 

It's sensible to start the process sooner rather than later in the tax year as Bed & ISA transactions can take time to complete, particularly for investors holding paper share certificates. These must first be transferred to a General Investment Account with an ISA provider before they can be sold, and the gain crystallised – a process that can take weeks.