Why fill your ISA before investing anywhere else

The £20,000 ISA allowance is the simplest tax break most people have. Here's why Plan My Freedom sends spare money there first, and when it shouldn't.

Every tax year you can put up to £20,000 into ISAs. Whatever it earns — interest, dividends, growth — is yours with no tax to pay, and you can take it out whenever you like. That combination of tax-free and no strings is why the default "spare money" rule in Plan My Freedom fills your ISA before anything else.

What the tax saving is worth

Outside an ISA, a general investment account is taxed twice: on dividends above the £500 allowance, and on profits above the £3,000 capital gains allowance when you sell. For a basic-rate taxpayer that's 8.75% on dividends and 18% on gains; for a higher-rate taxpayer 33.75% and 24%.

On a portfolio that grows to £200,000 over twenty years, the difference between an ISA and a taxable account can run to tens of thousands of pounds — money that compounds in your favour rather than the Treasury's.

Cash ISA or stocks & shares ISA?

They share the same £20,000 allowance, so the question is what the money is for.

  • Money you might need within five years — a cash ISA (or ordinary savings; the interest allowance covers most people).
  • Money for ten years or more — a stocks & shares ISA. Over long periods a balanced portfolio has historically beaten cash by a wide margin, and the ISA wrapper means you keep all of it.

Plan My Freedom treats a cash ISA as cash and a stocks & shares ISA as invested, so the mix you choose shows up in the projection.

When the ISA shouldn't come first

  1. You haven't got an emergency buffer. Three to six months of spending in easy-access cash comes before any investing. The "minimum cash to keep" setting exists for exactly this.
  2. Your employer will match more pension contributions. Free money beats tax-free money. Take the full match first.
  3. You're a higher-rate taxpayer with spare pension allowance. Pension contributions get 40% relief on the way in; ISAs get nothing on the way in. Pensions win on tax — but the money is locked away until at least 57. Most people want both.
  4. Expensive debt. A card at 20% APR is a guaranteed 20% return when you clear it.

The Junior ISA

Children get their own allowance — £9,000 a year — in a Junior ISA that becomes theirs at 18. If you're saving for a child, it's the natural home, and you can switch it on in the Spare money step.

This is general education, not personal advice. Allowances are for the 2025/26 tax year and can change.