Investing Tax-Free in the UK: ISAs and Spread Betting

Individual Savings Accounts (ISAs)

An Individual Savings Account (ISA) is a tax-advantaged “wrapper” for cash or investments – any interest, dividends or capital gains earned inside an ISA are free of tax​. The UK offers several ISA types:

• Cash ISA: A tax-free savings account. Interest earned in a Cash ISA is never taxed​, so even basic-rate taxpayers avoid having to use their (limited) Personal Savings Allowance. These accounts are low risk (protected up to £85,000 per person under FSCS)​ and allow easy access, notice accounts, or fixed-rate options, depending on your needs.
• Stocks & Shares ISA: A tax-free investment account. You can buy funds, bonds or individual shares within it. Any profits (capital gains), dividends or interest earned are exempt from income tax or capital gains tax​. (For example, outside an ISA the first £3,000 of gains and £500 of dividends per year are tax-free, but in an ISA there is no limit.) However, as with any investment, your capital is at risk and can fall. It’s recommended to treat a Stocks & Shares ISA as a long-term investment – for example, holding for at least 5 years to ride out market swings​. (Be aware of platform fees and management charges when choosing where to open it.)
• Lifetime ISA (LISA): A special ISA for younger savers. You must be aged 18–39 to open one, and you can save up to £4,000 per year​. The government adds a 25% bonus (up to £1,000) on any money you put in, making it very attractive for first-time homebuyers or retirement savers​. You cannot withdraw funds before age 60 (or before buying your first home) without penalty. Like other ISAs, all interest, dividends and gains inside a LISA are tax-free​, but note that the LISA contribution counts against your lifetime £20,000 ISA allowance.
• Innovative Finance ISA (IFISA): A peer-to-peer (P2P) lending ISA. You lend money to individuals or businesses via a platform, and the interest you receive is tax-free​. An IFISA uses your normal £20,000 ISA allowance. It offers higher potential returns than a cash ISA, but carries higher risk: borrowers may default, and P2P loans are not covered by FSCS​. If you do use an IFISA, diversify your loans to mitigate risk, and remember that unlike normal savings accounts, withdrawals may not be instant.

Contribution Limits (2025/26): Each tax year (6 April–5 April), UK residents get an overall ISA allowance of £20,000​. You can split that £20k across a Cash ISA, Stocks & Shares ISA, and/or an IFISA in any combination, up to the total. (For example, £10k in a Cash ISA and £10k in a Stocks ISA.) The Lifetime ISA has its own £4,000 limit, which can be put aside from the £20,000. In other words, you could save £4,000 in a LISA and another £16,000 among your other ISAs in the same year. Any unused ISA allowance does not roll over, so use it or lose it.

There are rumours of potential cuts to ISA limits. For instance, consumer experts report that the government is considering slashing the cash ISA allowance (currently part of the £20k total) dramatically – perhaps to as low as £4,000​. Nothing is confirmed yet, but savers should be aware that the current generous £20,000 allowance may be reduced in future budgets, especially for cash savings.

Spread Betting as an Investment Strategy

What is Spread Betting?

Spread betting is a leveraged derivative product: you bet a stake per point on the price movement of an underlying asset (stocks, indices, currencies, etc.)​. You never actually own the shares or index; instead, your profit or loss is based on how far the market moves from when you open the bet to when you close it. Because no actual asset is bought or sold, HMRC treats spread betting as gambling – “no chargeable gains or allowable losses arise”​– meaning in normal circumstances gains are exempt from UK capital gains tax. 

Replicating a Portfolio

In principle, you can mirror a traditional investment portfolio using spread bets. For example, to mimic owning shares in Company X, you would open a long (buy) spread bet on X for an appropriate stake per point. For multiple holdings, place separate bets sized to reflect your desired allocation. If the stocks move up or down, your spread bets move proportionally (minus the bid-ask spread and any financing costs). This can be done for indices or sector bets too, effectively mirroring a fund. The advantage is leverage: you only need to deposit the margin (a fraction of the full position) to gain equivalent exposure.

Key Risks – Leverage and Liquidation

Because spread bets are leveraged, small price moves can cause large gains or losses. Brokers typically require only a small initial deposit (margin) to open a position​, so losses can easily exceed your deposit. If losses approach your deposit, the broker will issue a margin call and eventually liquidate (close) your bet to prevent the account going negative. In practice, this means if your position moves too far against you, you can be stopped out at a loss.

To avoid “intempestive liquidations,” it’s critical to manage margin carefully. Strategies include:

• Maintain a Cash Buffer: Keep extra cash in your account beyond the minimum margin. This buffer lets you withstand larger market swings without dropping below the margin threshold.
• Set Realistic Position Sizes: Don’t over-leverage. Only trade positions where your available equity far exceeds the required margin.
• Use Appropriate Stops or Warnings: Although stop-loss orders can exit you sooner (preventing larger losses), they also lock in some loss. Alternatively, manually top up funds or reduce positions if markets move.
• Regular Monitoring: Check margin levels frequently. If the market becomes volatile, adding funds preemptively can prevent forced liquidation.

The margin requirement varies by broker and market (often 5–20% for stocks). For example, if a stock costs £100 and has a 10% margin requirement, you need £10 in your account to hold £100 of exposure. If that stock falls by 10%, you would lose £10, wiping out your deposit. Adding extra funds increases the tolerated drop. (See the Calculator Tool below for a precise formula.)

Long-Term vs. Short-Term Mindset

Spread betting is often used by day-traders, but it can also be deployed for long-term investing (sometimes called “buy-and-hold spread betting”). If you choose this route, treat it like an investment account, not a casino. That means holding positions for months or years rather than seconds, diversifying bets (e.g. by sector or index), and routinely reviewing positions. Be aware of funding costs: most spread bets incur an overnight interest/financing charge if held beyond the trading day​. For long-term positions you will accumulate these costs (for a long stock bet, you generally pay interest as if you’d borrowed money to buy shares). Unlike normal share ownership, you also won’t receive dividends directly – brokers adjust your account by roughly the dividend amount (positive or negative) when dividends occur.

Popular Platforms

Leading UK spread-betting brokers include IG, CMC Markets and CityIndex, all FCA-regulated. IG, for example, is one of the world’s largest spread-bet providers. These platforms offer access to thousands of markets (UK and US stocks, indices like the FTSE 100 or S&P 500, forex, commodities, etc.), with transparent margin requirements. They also provide demo accounts, news feeds, and risk warnings – take advantage of educational resources before trading.

Tax Implications and Risks

Currently, UK law treats spread-bet profits as tax-free gambling gains​. This means no Capital Gains Tax or stamp duty is due on winnings​, and you do not report them on a tax return (for typical retail punters). However, this favorable status could change if laws are amended, so don’t rely on it indefinitely. Moreover, if HMRC deems that your spread betting activity resembles a trading business – for example, if you trade full-time like a professional – they could classify your profits as income and subject them to Income Tax. For most casual investors, this is unlikely, but it’s wise to keep spread betting part of a diversified strategy and consult a tax adviser if your trading becomes very large or systematic.

Calculator: Cash Buffer vs. Price Movements

To prevent a position from being liquidated at a certain downside level, you can calculate how much cash buffer you need in your account. This calculator lets you calculate the amount of additional cash need to prevent intempestive liquidations by using a floor price that you are very confident will never be reached (the lower the floor, the more cash buffer you need but the less likely you will be liquidated).