ISAs and compound interest: how much your savings could grow in 2026/27
How compound interest works, how much you can put in an ISA in 2026/27, Cash vs Stocks & Shares vs Lifetime ISAs, how savings and dividends are taxed outside an ISA, and worked examples of regular saving.
- Written by
- Arnold Gold, Product Manager
- Published
- 12 October 2026
- Figures checked
- 12 October 2026
How compound interest works
Compound interest is interest on your interest. Each period's return is added to the balance, and the next period's return is earned on that larger balance. Over short spells the effect is small; over decades it becomes most of the result.
Take £10,000 in a savings account at 4% a year. Compounded monthly for 10 years it grows to £14,908; compounded once a year, £14,802. The difference is the compounding frequency — small, but always in favour of more frequent compounding at the same quoted rate.
Regular saving compounds too: every monthly contribution starts earning as soon as it goes in, so the earliest payments grow the longest. That's why the ISA & compound interest calculator shows growth climbing faster in later years even when you pay in the same amount every month.
ISA rules for 2026/27
An Individual Savings Account is a wrapper: what's inside it isn't taxed. The key rules (GOV.UK):
- In the 2026/27 tax year you can save up to £20,000 in ISAs in total.
- You must be 18 or over and resident in the UK (with exceptions for some Crown servants).
- ISAs are individual — you can't hold one jointly.
- You can put it all in one account or split it across several — but only one Lifetime ISA per tax year. The tax year runs from 6 April to 5 April.
- To move an ISA, ask the new provider for its transfer form. Withdrawing the money yourself and paying it in elsewhere uses up allowance — you can't reinvest that part again (GOV.UK).
The main types:
| ISA | What it holds | Best for |
|---|---|---|
| Cash ISA | Savings at an interest rate | Money you may need within a few years |
| Stocks & Shares ISA | Funds, shares, bonds | Long-term investing (5+ years) |
| Lifetime ISA | Cash or investments, plus a bonus | A first home, or later life |
| Innovative Finance ISA | Peer-to-peer lending | Higher-risk lending |
The Lifetime ISA bonus
You can pay up to £4,000 a year into a Lifetime ISA, and the government adds a 25% bonus — up to £1,000 a year. Your payments count towards the £20,000 overall allowance. You must make your first payment before you're 40, and you can keep paying in until 50. It can be used to buy your first home or saved for later life (GOV.UK).
The bonus is an instant 25% on what you pay in, before any investment growth — hard to beat for anyone who qualifies. The trade-off is access: taking money out for any other reason carries a charge, so check the withdrawal rules on GOV.UK before committing money you might need.
How savings are taxed outside an ISA
Most people don't pay tax on modest savings even outside an ISA, thanks to the Personal Savings Allowance (GOV.UK):
| Income tax band | Tax-free savings interest |
|---|---|
| Basic rate | £1,000 |
| Higher rate | £500 |
| Additional rate | £0 |
On top of that, if your other taxable income is under £17,570, the starting rate for savings can make up to £5,000 of interest tax-free; every £1 of other income above your Personal Allowance reduces it by £1.
Investments outside an ISA have their own allowances: the first £500 of dividends is tax-free (GOV.UK), and gains above the £3,000 capital gains allowance are taxed when you sell (see our CGT on shares guide). As a pot grows, those allowances run out quickly — which is when the ISA wrapper starts saving real money.
Worked examples
All projections use an illustrative 5% a year after charges. Real returns vary, can be negative, and aren't guaranteed.
Filling your ISA allowance every year
Saving the full £20,000 a year — about £1,667 a month — for 20 years puts in £400,080 and could grow to about £679,232, with £279,152 of growth, all of it tax-free inside the ISA.
£200 a month for 25 years
You pay in £60,000; at 5% it could reach £117,624. Almost half of the result is growth, not contributions.
Starting early vs saving more later
£250 a month from 30 to 65 (35 years) pays in £105,000 and could reach £278,245. Doubling to £500 a month but starting at 45 (20 years) pays in £120,000 — more — yet reaches only £203,729. Fifteen extra years of compounding outweigh doubling the contribution.
Lump sum or monthly?
If you already have the money, investing it all at once usually ends up ahead, because every pound is invested for the full period. £12,000 invested on day one at 5% for 10 years could grow to £19,547; the same £12,000 paid in at £100 a month reaches £15,499.
Monthly saving still wins in practice for most people, because the real choice is usually between saving monthly and not saving at all — and spreading purchases over time means you never put everything in on a single bad day.
Inflation: what the projection is worth in today's money
Every projection above is in future pounds. Prices rise over 25 years, so a future balance buys less than the same number would today. To see the real value, divide by the growth in prices over the period.
Take the £200-a-month example. If prices rose by an illustrative 2% a year, the £117,624 it could reach would buy roughly what £71,696 buys today. That is still well above the £60,000 paid in — but it is the honest number to plan with.
A quick way to do this in the calculator: subtract your inflation assumption from the return. Projecting at 3% instead of 5% gives an answer close to today's money, which is a better guide to what a pot will actually pay for.
Choosing between cash and investments
- Needed within a few years? A Cash ISA or easy-access savings: the rate is known and the balance doesn't fall.
- Five years or more away? A Stocks & Shares ISA has historically offered higher long-run growth, but values go down as well as up.
- First home or retirement, under 40? The Lifetime ISA's 25% bonus is worth checking first.
- Higher-rate taxpayer saving for retirement? Compare with a pension, where contributions get relief at your top rate — see the pension tax relief guide.
Common mistakes
- Withdrawing to switch provider. Use the new provider's transfer form, or the withdrawn amount can't go back in under the allowance.
- Opening two Lifetime ISAs in a year. You can split the £20,000 across several ISAs, but only pay into one Lifetime ISA per tax year.
- Projecting with an optimistic rate. Try 3% and 5% as well as anything higher, and remember fees reduce the return.
- Ignoring inflation. A projected figure in 20 years buys less than the same figure today.
Frequently asked questions
Frequently asked questions
How much can I put in an ISA in 2026/27?
Up to £20,000 across all your ISAs in the 2026/27 tax year (GOV.UK). Lifetime ISA payments, up to £4,000, count towards it.
Is ISA interest taxed?
No. You don't pay tax on interest from cash in an ISA, or on income or capital gains from investments in one — and the savings stay tax-free while they remain in the account after the tax year ends.
How much interest can I earn tax-free outside an ISA?
Up to £1,000 a year as a basic-rate taxpayer, £500 as a higher-rate taxpayer, and nothing as an additional-rate taxpayer — plus up to £5,000 more under the starting rate for savings if your other income is low enough.
What is the Lifetime ISA bonus?
The government adds 25% to what you pay in, up to £1,000 a year on the maximum £4,000. You must make your first payment before 40, and can pay in until 50.
Does compounding monthly really make a difference?
A little. £10,000 at 4% for 10 years grows to £14,908 compounded monthly versus £14,802 compounded yearly.
Can I have more than one ISA?
Yes. You can save up to £20,000 in one account or split it across several in a tax year (6 April to 5 April) — but you can only pay into one Lifetime ISA per year, up to £4,000.
Can I open an ISA if I live abroad?
Generally you must be UK resident. GOV.UK lists exceptions for members of the armed forces and Crown servants (and their spouses or civil partners).
Sources
Related guides
Not financial advice