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Tax-efficient individual savings accounts (ISAs) are one of the most popular ways to save or invest, and with less than a month to go to make the most of your annual ISA allowance before the end of the 2025/26 tax year, you might be wondering which type of ISA to choose.
Relatively low savings rates in recent years have meant that many people have turned to stocks and shares ISAs in the hope of generating higher returns. However, recent stock market volatility has left many investors understandably nervous, boosting the appeal of safer savings options.
The good news is that if you’re not sure where to invest your ISA allowance this tax year, it doesn’t have to be an either/ or decision. You can split your allowance between different types of ISA, so you can put some into a cash ISA, some into a stocks and shares ISA, and some into an innovative finance ISA (which invests in peer-to-peer lending) if you want to. ISA rules changed in April 2024, so you can now pay into more than one of each type of ISA each tax year if you want to.
You can learn more about ISAs in our article Everything you need to know about ISAs.
To help you decide whether a cash or stocks and shares ISA is better for you, or whether you might want to split your allowance between the two, we explain the differences between them, and look at some of the advantages and disadvantages of each.
Contents
What is a cash ISA?
A cash ISA is a type of savings account that protects your savings and any interest you earn from income tax. It’s called a cash ISA because the money you deposit into this sort of account is held in cash instead of being used to buy stocks or shares. This makes cash ISAs a safer option as the money you hold can’t go down in value (although it can be eroded by inflation), but it can if it’s in a stocks and shares ISA.
Under current ISA rules, you can put your whole £20,000 ISA allowance into a cash ISA this tax year, but from 2027, under-65s will only be able to save a maximum of £12,000 into cash ISAs. You can read more about this in our article What could Budget changes to cash ISAs mean for you?
There are a number of types of cash ISAs available, each of which has different features. They’ll usually either be a fixed rate ISA, which will mean your money will be tied up for a specific period of time at a fixed interest rate, or a variable rate ISA, where the interest rate will fluctuate. Providers that offer fixed rate ISAs typically offer a range of terms, often starting from six months and going up to as long as five years. Find out more in our article Best cash ISA rates – which cash ISAs pay the most interest?
Who might want a cash ISA?
Cash ISAs can be a good option for people who aren’t comfortable taking any risks with their savings, and who want to protect their returns from tax. They can be especially useful if you plan to use your money within the next few years, for example perhaps because you want to help your children out with a wedding or a house deposit, or maybe because you’re planning some home improvements for yourself, as you can usually access your money quickly.
Before you open a cash ISA it’s worth checking the rates offered by other types of savings account to make sure you’re getting the highest interest rate possible on your money.
It’s worth noting too that thanks to the Personal Savings Allowance, you can earn up to £1,000 in interest each year in any type of savings account without paying tax. This drops to £500 if you’re a higher rate taxpayer and there’s no Personal Savings Allowance if you’re an additional rate taxpayer. This means that unless you have a very large savings balance, your returns will usually be tax-free anyway.
However, if you’re looking for a longer-term home for your money and you have a good-sized savings pot, then an ISA has a couple of benefits. Firstly, cash ISA interest doesn’t count towards your Personal Savings Allowance, so if you do have a large amount of savings and think you might use up this allowance, cash ISAs are still very worthwhile. Learn more about how the Personal Savings Allowance works in our article What is the Personal Savings Allowance?
What are the benefits of a cash ISA?
Easy to open tax-free savings
Cash ISAs are straightforward to open and manage. You can save up to £20,000 a year and not pay a penny of income tax on the interest you earn. With the top cash ISA accounts currently paying up to 4.48%, if you deposited the full cash ISA allowance this tax year, you could earn tax-free interest of anywhere up to £896 over a year.
Less risk
Compared to investment, or stocks and shares ISAs, cash ISAs are a safer way of growing your savings. With a cash ISA, there is no risk that the value of your savings will go down, so you know that you’ll get back at least what you’ve put in. Bear in mind, however, that cash ISA returns can still be impacted by soaring inflation, which erodes the purchasing power of your cash. Learn more about this in our guide What does inflation mean for my money?
Instant access options
If you aren’t keen on tying up your money for any length of time, some cash ISAs allow easy access to your savings. Our article Best cash ISA rates: Which cash ISAs pay the most interest? which is updated weekly, explains which cash ISAs pay the best returns.
What are the disadvantages of a cash ISA?
Transfer troubles
Not all ISA accounts will let you transfer in your ISA from previous years so you might not always be able to get the best returns if you want to move to a higher-interest paying account. Find out more about cash ISA transfers in our guide How do I transfer to a better cash ISA?
Less risk but potentially lower rewards
Although cash ISAs are lower risk than stocks and shares ISAs, the latter have the potential to provide higher returns (but could also result in losses). Even if your cash ISA is one of the more competitive available, there’s a risk that in real terms you could actually be losing money if your returns can’t keep up with inflation. That means it’s really important to keep a close eye on how much interest you’re earning and to transfer your savings if you could be doing better elsewhere.
What is a stocks and shares ISA?
A stocks and shares ISA is a type of investment account where again any returns you make are tax-free. The money you deposit into your stocks and shares ISA account is used to invest in the stock market, so there is a risk that you could get back less than you put in.
You can invest in a range of investment types and assets within a stocks and shares ISA wrapper, including: unit trusts, investment trusts, exchange-traded funds, individual stocks and shares, corporate and government bonds, property funds, and Open Ended Investment Companies (OEICs).
Funds can be useful to spread the risk of investing, so if one investment performs badly, hopefully better performance from other investments will help offset any losses.
Who might want a stocks and shares ISA?
If you’re looking to earn potentially higher returns than a cash ISA can provide and are happy to leave your money invested for five or more years, a stocks and shares ISA might be something you may want to consider, provided you’re comfortable accepting the risks involved.
It’s important to remember, however, that investments can be volatile, so you’ll need to be comfortable accepting the fact that you could get back less than you put in.
If you think stocks and shares ISAs sound interesting, but you aren’t sure what level of risk you’re comfortable with, have a look at our article What’s your attitude to risk? to understand what your risk appetite is.
What are the benefits of a stocks and shares ISA?
Potentially higher returns
Stocks and shares ISAs have historically tended to provide higher returns than cash ISAs over long-term periods, as well as the possibility for long-term investment growth from compounding returns.
Easy to open tax-free investments
Stocks and shares ISAs are also easy to open and most platforms make managing your account really straightforward. Many offer a range of ready-made investment portfolios that match different levels of risk, so you don’t have to spend hours picking investments yourself. Like other types of ISA, you can deposit up to £20,000 a year into a stocks and shares ISA and you won’t pay any tax on the returns your investments make.
What are the disadvantages of a stocks and shares ISA?
Affected by stock market volatility
Recent days have seen widespread social and political uncertainty, with conflict in the Middle East affecting stock market performance around the world. This is one of the reasons that it can be a good idea to commit to five or more years with stocks and shares ISAs as it allows for markets to recover after they’ve dipped. For more information on this have a look at our article, Four ways to weather stock market storms.
Higher risk
While there’s the chance you could get higher returns, with stocks and shares ISAs there’s also a risk that you’ll get back less than you put in. With any type of investment, you’ll need to be comfortable accepting a higher level of risk.
Finally…
The best kind of ISA is one that works for you and your financial goals, as well as your investment timeframe and your approach to risk. This will vary from person to person, so don’t feel pressured to open an account that isn’t right for you.
Every ISA will have its own features and terms and conditions so it’s really important that you fully understand any account you’re thinking of opening. Always make sure you read the fine print before you commit to anything, and if you’ve chosen a stocks and shares ISA, make sure you’re clear about what the charges are.
Have a look at our articles How cash ISAs work, 5 things to consider before you invest in a stocks and shares ISA and Everything you need to know about ISAs to find out more.
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