Why are ISA savings accounts in the UK tax free? What's the catch?

Answer 1

There's no catch. ISAs (individual Savings Accounts) are a replacement by the labour government for the PEPs (Personal Equity Plans) introduced by the Conservative Party to encourage people's capitalism.

You can invest £7000 worth of shares, unit trusts or investment trusts per year into them and not pay any capital gains tax when you sell the shares (and buy different shares within the ISA or withdraw the cash).

Over several years, you can build up a large fund to supplement your retirement income or use for anything you like. Unlike a pension, you can sell the shares and withdraw the cash at any time.

See wikipedia article for details of the taxation of dividends and other types of Cash ISA where you just earn interest on cash deposits. Dividends used to be tax-free in ISAs, but they changed the rules to tax them a bit.