A taxable investment account and an ISA can hold similar assets, but they do not behave the same after tax. If interest, dividends or capital gains are taxed outside the wrapper, the lost return is no longer available to compound. Over 10 years that gap can be noticeable. Over 20 years it can become one of the biggest differences between two otherwise identical UK portfolios.

The Formula in Plain Language

The basic comparison is simple: future value equals contributions, plus investment growth, minus any tax taken along the way. The ISA version removes most of the tax calculation because returns inside an ISA are generally sheltered from UK tax. According to GOV.UK, the ISA allowance for the 2026 to 2027 tax year is 20,000 GBP, and ISAs can include Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs and Lifetime ISAs (GOV.UK, 2026).

The calculator therefore asks for the amount invested, the assumed annual return, the investment period and the tax assumptions for the taxable account. The return might come from interest in cash, dividends from shares, capital growth from funds, or a mixture. MoneyHelper groups ISAs among savings options, while also separating savings and investing choices by purpose and risk (MoneyHelper, 2026). That distinction matters: a Cash ISA and a global equity fund inside a Stocks and Shares ISA are not the same risk, even though both sit inside an ISA wrapper.

For the taxable account, the key variable is tax drag. Tax drag is the part of the return that is lost to tax before it can keep compounding. Capital Gains Tax is charged on the profit when an asset is sold, not on the whole sale value, and GOV.UK explains that some assets are tax-free while gains below the relevant annual allowance may not be taxed (GOV.UK, 2026). In practice, the timing of sales, dividend distributions, interest payments, allowances and your Income Tax position can all change the result.

The equation behind the calculator can be read like this:

ISA value = annual contributions compounded at the assumed return.

Taxable value = annual contributions compounded at the assumed return, reduced by dividend tax, savings tax, capital gains tax, fund turnover and any tax paid when assets are sold.

That is why a small tax rate can have a large long-term effect. It is not only the tax paid in year one. It is the missed growth on that tax in every year after it leaves the account.

A Worked Example

Imagine an investor puts 5,000 GBP a year into a Stocks and Shares ISA for 20 years and assumes a 5 percent annual return after fund charges. A second investor makes the same 5,000 GBP annual contribution into a taxable general investment account, using the same investment and the same 5 percent return before tax.

Read also: ISA Early Birds vs. Late Savers in the UK: Which Strategy Maximises Your Returns?

If the ISA investor earns the full 5 percent inside the wrapper, the pot after 10 years is about 62,889 GBP, assuming contributions are made at the end of each year. After 20 years, it is about 173,596 GBP.

Now assume the taxable account suffers a 0.75 percentage point annual tax drag, so the effective return falls from 5 percent to 4.25 percent. That might reflect a simplified blend of dividend tax, interest tax, taxable distributions and eventual capital gains tax. The 10-year value falls to about 61,177 GBP. The 20-year value falls to about 160,048 GBP.

The gap is modest at first: around 1,712 GBP after 10 years. By year 20 it is about 13,548 GBP. The annual tax drag has not changed, but compounding has magnified the difference. If contributions were higher, returns stronger, tax rates higher, or the holding period longer, the ISA advantage would usually become larger.

This does not mean an ISA is automatically the right home for every pound. The wrapper has limits, and the annual ISA allowance is use it within the tax year or lose that year of shelter. As of June 2026, verify current terms, tax rules and provider charges with HMRC, the relevant provider, or an FCA-authorised adviser before deciding. MoneySavingExpert also highlights that Stocks and Shares ISAs are investment accounts, so the value can fall as well as rise (MoneySavingExpert, 2026).

What the Calculator Helps You See

The useful output is not a promise of future returns. It is a sensitivity test. Try a 3 percent return, then 5 percent, then 7 percent. Try 10 years, then 20 years. Then change the tax drag assumption. The point is to see when tax becomes material enough to affect your account choice.

For short time horizons, low returns or unused allowances outside an ISA, the difference may be small. For long horizons, regular investing and assets that produce taxable income or gains, the ISA wrapper can become more valuable. The maths is especially relevant for investors who have already built an emergency fund, use low-cost diversified funds, and want to decide whether new money should go into a Stocks and Shares ISA or a taxable general investment account.

The calculator is also useful for comparing order of operations. A saver might first use a Cash ISA for short-term goals, then use a Stocks and Shares ISA for longer-term investing, then place any extra money in a taxable account once the ISA allowance is used. Another person might have little tax to pay outside an ISA today, but still prefer the wrapper because future income, gains and allowances are uncertain. Tax rules and allowances can change each tax year, so current HMRC guidance should be checked before relying on any assumption.

This article is general education, not regulated financial advice. Nexzoe is not authorised by the FCA. Tax treatment depends on personal circumstances and can change each tax year, so consider speaking to an FCA-authorised Independent Financial Adviser, accountant or qualified tax adviser before making decisions that affect your own investments.