What is an ISA and why does it matter as a Muslim investor?

Managing money as a Muslim in the UK can feel like walking a financial tightrope. On one side, you want to save and grow your wealth responsibly. On the other, you’re careful to avoid anything linked to riba (interest), gambling, or unethical industries.

That balance can make modern financial products like ISAs seem confusing. But when you look closer, ISAs themselves are simply tax-efficient accounts. They do not determine whether something is halal or not - the underlying assets do. Once understood correctly, ISAs can offer a tax-efficient way for Muslims to invest in a Shariah-compliant manner.

This article explains how ISAs work, why they matter, and how they can be used in a halal way. It is for educational purposes only and does not constitute financial advice.

What is an ISA?

An ISA (Individual Savings Account) is a UK government-approved account that protects eligible savings and investments from tax.

When money is held inside an ISA:

• You do not pay income tax on interest or dividends
• You do not pay capital gains tax (CGT) on investment gains

The annual ISA allowance for the 2025/26 tax year is £20,000, shared across all ISA types. Any unused allowance does not carry forward to the next tax year.

Source:
HMRC – Individual Savings Accounts (ISAs)

There are several types of ISA, including:

• Cash ISA
• Stocks & Shares ISA
• Lifetime ISA (LISA)
• Innovative Finance ISA

Recent rule changes mean you can now open and pay into more than one ISA of the same type in the same tax year, as long as your total ISA contributions stay within the £20,000 annual limit. The exception is the Lifetime ISA, where you can only contribute to one per tax year.

Some ISA structures contain interest-bearing or non-Shariah-compliant assets by default. Others can be used in a halal way depending on the investments chosen.

Are ISAs halal?

An ISA itself is neutral. Islamic permissibility depends entirely on the assets held inside the ISA.

An ISA may be halal when it contains:

• Shariah-screened equities
• Halal multi-asset funds
• Sukuk (Islamic certificates)
• Gold held via Shariah-compliant structures

An ISA would not be considered halal if it contains:

• Interest-bearing products
• Conventional bonds
• Companies involved in non-permissible sectors such as alcohol, gambling, pork, arms, or conventional banking

In short, the wrapper is neutral. Compliance depends on the underlying investments.

Cash ISAs

A Cash ISA is only Shariah-compliant if it is offered by an Islamic bank using approved contracts such as Murabaha or Wakala. Most conventional Cash ISAs pay interest, which is not compliant with Islamic finance principles.

Source:
Moneyhelper  – Cash ISAs

Stocks & Shares ISAs

A Stocks & Shares ISA can be halal when all securities meet Islamic ethical and financial screening criteria, and when ongoing monitoring and purification processes are in place.

It is also now possible to hold fractional shares within a Stocks & Shares ISA. This allows investors to buy smaller portions of higher-priced shares. Any buying or selling that takes place within the ISA wrapper remains tax-free.

Source:
MoneyHelper – Stocks & Shares ISAs

Lifetime ISAs (LISA): a Shariah-compatible government incentive

A Lifetime ISA allows adults aged 18 to 39 to contribute up to £4,000 per year. The government adds a 25% bonus, up to £1,000 a year.

Funds can be used toward a first home (subject to conditions) or accessed after age 60. Withdrawals for other reasons usually incur a penalty.

The government bonus is generally viewed as permissible, as it is considered an incentive rather than interest on a loan or deposit. For this reason, Muslim investors who want to remain Shariah-compliant typically prefer a Stocks & Shares LISA holding halal investments rather than a Cash LISA.

Source:
GOV.UK – Lifetime ISA

Why ISAs matter: tax rules are changing

Recent changes to UK tax allowances mean more savers may now fall into taxable categories outside an ISA:

• The dividend allowance has reduced to £500
• The capital gains tax allowance has reduced to £3,000

Sources:
HMRC – Tax on dividends
HMRC – Capital gains tax allowances

Inside an ISA, these taxes do not apply. This can make long-term investing more tax-efficient, although tax treatment depends on individual circumstances and may change in future.

Illustrative example (FCA-compliant projections)

The following is an illustrative scenario using the FCA’s standard long-term projection rates. It is not a forecast or a recommendation.

Scenario (illustrative only):

Someone contributes £5,000 per year into a Shariah-compliant Stocks & Shares ISA.

After 15 years, their pot might be:

• Low rate (2%): approximately £90,900
• Mid rate (5%): approximately £113,800
• High rate (8%): approximately £142,600

Source:
FCA Handbook – COBS 13 projection rates

All growth inside an ISA would be free from dividend tax and capital gains tax. Actual outcomes may differ significantly.

How halal investing works inside an ISA

A Shariah-compliant ISA typically includes:

• Equities that pass Islamic screening and financial ratio checks
• Sukuk designed to generate profit without interest
• Gold, provided the structure meets Shariah requirements

Platforms specialising in halal investing typically use Shariah Supervisory Boards, screening processes, and purification mechanisms to help maintain compliance over time.

ISA eligibility and transfers explained neutrally

Opening an ISA generally involves:

• Choosing the type of ISA that fits your goals
• Selecting a provider offering Shariah-compliant options
• Choosing a risk level or investment approach suitable for you

ISAs can be transferred between providers without losing their tax-free status, provided the official ISA transfer process is used.

Recent rule changes also allow partial ISA transfers, meaning you can move only part of your ISA balance to a new provider while keeping the remainder where it is.

Common questions for Muslim investors

Is a Cash ISA halal?
Only if it is offered by an Islamic bank using Shariah-compliant contracts. Most conventional Cash ISAs are interest-based.

Is the LISA government bonus halal?
It is generally considered permissible as an incentive rather than interest.

Can I hold multiple ISAs?
You can now open and pay into more than one ISA of the same type in the same tax year, as long as your total ISA contributions remain within the £20,000 annual limit.

Source:
MoneyHelper – ISAs explained

What happens to an ISA on death?
A spouse or civil partner may receive an Additional Permitted Subscription (APS) equal to the value of the ISA.

Source:
HMRC – Inheriting an ISA

Why this matters for building long-term wealth

Some Muslim investors avoid investing due to uncertainty around halal options. Remaining entirely in cash, however, exposes savings to inflation.

According to the Office for National Statistics, UK CPI inflation averaged 3.5% in 2025.

Source:
ONS – Consumer price inflation, UK

A Shariah-compliant ISA can provide a tax-efficient structure for those who want to grow wealth responsibly while aligning with Islamic principles.