Important information
Tax treatment depends on your individual circ*mstances and may be subject to future change.
Your capital is at risk. All investments carry a degree of risk and it is important you understand the nature of these. The value of your investments can go down as well as up and you may get back less than you put in.
While cash Isas provide some certainty for your returns, you could earn more with a stocks and shares Isa. However, this option does come with more risk. Our guide explains which Isa could be best for you.
While much of the UK keeps its money cash Isas, the appeal of stocks and shares Isas is growing. In the period from 2021 to 2022, the last recorded by HMRC, just over 60% of new Isa subscriptions were for cash versions.
This is a declining figure, with cash Isas making up two thirds of Isa subscriptions in the year 2020 to 2021. By contrast, stocks and shares Isas enjoyed a rise of around 345,000 through this period.
But a growing interest in stocks and shares Isas doesn’t necessarily mean you should join the trend. That’s why we’ve listed the characteristics of both Isas below to help you compare your options. We explain:
- Reasons to use a cash Isa
- Reasons to use a stocks and shares Isa
- Which Isa should I choose
- Are there any other options to consider?
Read more: The key Isa rules 2024 explained
*This article contains affiliate links which earn us revenue
What is a cash Isa?
A cash Isa allows you to save your money tax-effectively. This is what differs it from a savings account, because all the interest you earn is exempt from income tax.
If you wanted, you can invest your entire Isa allowance, of £20,000, into your cash Isa each year. But then nothing would be left that tax year for other Isas.
Cash Isas come in two forms, either as a variable or fixed rate.
A fixed rate provides a guaranteed return over a specified period while a variable rate can change at your provider’s discretion.
The table below lists some of the best easy access cash Isas on offer, and you can read more about these offers and how they compare to fixed-rate Isas in our guide.
| Provider | Account name | Interest rate (AER) | Min/max deposit | Account access | |
|---|---|---|---|---|---|
 | Trading 212 Cash ISA | 5.00% | £1 / £0 | MobileBanking / Online | |
 | Plum Cash ISA * | 4.92% | £100 / £40,000 | MobileBanking / Mobile | More info |
 | Online Cash ISA (Issue 4) | 4.85% | £5,000 / £250,000 | Online | |
 | Easy Access Cash ISA (1 Withdrawal) | 4.85% | £1 / £500,000 | Branch / Online / Post | |
 | Chip Cash ISA * | 4.84% | £1 / £20,000 | MobileBanking / Mobile | More info |
Powered by data from Savings Champion
Reasons to use a cash Isa
In a higher interest rate environment, cash Isa providers typically offer more lucrative rates. In 2021, when interest rates were at a record low, the typical cash Isa paid just 0.43%, according to Moneyfacts, a data company.
But over the next three years, when the Bank of England raised the base rate 15 times to 5.25%, these returns grew to 3.90%.
Now the base rate stands at 5%, receiving its first cut since 2020. So while interest rates are still historically high, further cuts could prompt a fall in rates.
But it’s these guaranteed returns which some people find comforting. If they find a cash Isa that pays more than the rate of inflation, and there are some options which now do, then it becomes reassuring to know your wealth will grow.
Laith Khalaf, Head of Investment Analysis at AJ Bell, an investing platform, also explained that they can be a great place to keep an emergency savings fund.
“Cash Isas are not very flexible in that they can only ever hold cash, but this does make them good for storing money that you might need at the drop of a hat,” he said.
Plus, because the interest earned on cash Isas don’t count towards your Personal Savings Allowance you’ll know that you won’t get a surprising tax bill which eats into your returns.
Cash Isas also come with FSCS protection, meaning if the institution you hold your money with fails then it’ll repay any money you lose up to the value of £85,000. More information on this scheme can be found in our guide.
No management fees for 12 months with Wealthify
If you’re thinking about investing, then now could be a good time to do so with Wealthify: your easy-to-use, online saving and investing service. As a Times Money Mentor reader, Wealthify are offering zero management fees (usually 0.6%) for new customers who open any one of their investment products, including Isas, Junior Isas, Pensions and General Investment Accounts. To be eligible, you’ll need to use the link below.
T&Cs apply. Capital at risk. The tax treatment of your investment will depend on your individual circ*mstances and may change in the future. Wealthify is authorised and regulated by the Financial Conduct Authority.
Which ISA is right for me?
ISAs work best when you pick the right one for your savings goal. Take this short survey to find out which ISA might be right for you.
- It only takes a couple of minutes
- No personal details required
A stocks and shares Isa differs from a general investment account because the money you earn is protected from capital gains tax. But, its fundamental difference to a cash Isa is that your investment can fluctuate in value.
This means your returns are never guaranteed, so while you may end up outperforming some of the best cash Isas you also may lose your original capital.
A stocks and shares Isa allows you to invest in more than just listed companies across the globe, like Apple or HSBC. Via investment trusts and certain funds you can also be exposed to government and corporate bonds.
Read more: A simple guide to stocks and shares Isas
Reasons to use a stocks and shares Isa
If you have a long-term savings goal in mind, then a stocks and shares Isa can be greatly beneficial, according to Khalaf.
“It can be used for a variety of longer-term investment goals, such as saving for school or university fees, to pay off a mortgage, or to boost your retirement fund,” he explained.
As you’ll read later in this guide, people who invest their money into a stocks and shares Isa over the long-term generally outperform their cash Isa counterparts.
If you’re the type of person who isn’t keen on picking and managing your own portfolio, then there are options to enjoy some of this growth by letting a skilled individual manage your investments for you.
One way is to keep your money with an actively managed fund, and if you don’t know where to start our guide lists some of our best ready-made stocks and shares Isa portfolios.
Otherwise, there is the option to use robo-advice, where you’ll receive investing guidance from your chosen investing platform on what investment funds may suit you. It can be a handy option if you’re feeling confident enough to handle some of your portfolio and you’re just looking for ideas.
In this guide we list some providers which offer robo-advice.
Do cash Isas or stocks and shares Isas perform better?
Over the long-term, stocks and shares Isas have generally garnered better returns than their cash Isa equivalents: according to the 2019 Barclays Equity Gilt Study, stocks and shares have outperformed cash in 91% of 10-year periods.
For example, if someone invested in the FTSE 100 a decade ago they would have seen average returns of around 5% per year. This is according to Times Money Mentor calculations on data from the London Stock Exchange. In comparison, Moneyfacts said the average cash Isa paid 1.42% each year over the same period.
But over the shorter term cash Isas can pay more and provide greater stability.
Take the year of 2015 when the FTSE 100 dropped 3.3% in value. If you had invested £10,000 over this period your investments would have lost £330. By contrast, the average cash Isa paid 1.44%, meaning the same pot would have made £144 in interest.
Read more: “Should we save or invest money for our two-year-old daughter?”
Free Times article: The 20 best secret villages to live in
You probably haven’t heard of these pretty, quaint, under-the-radar UK villages, which is part of their special charm for home buyers and residents. Read more
Which Isa should I choose?
You don’t need to commit to only a cash or stocks and shares Isa.
In fact, it may be preferable from a risk point of view to use both options. If you wish to play it safe for a certain period, or if you’re working towards a shorter-term goal, then you could invest more money into your cash Isa. Conversely if you’re working towards a longer-term goal you can save more into a stocks and shares Isa.
Read more: “I bought and renovated my first home using my two Isas”
Are there any other options to consider?
The other alternative to these Isas is an innovative finance Isa.
These are less common and involve peer-to-peer lending. This means your money could be lent to individuals looking for a cash injection to a business needing to raise capital. There arelimited protections in place should the borrower default. In some cases there are contingency funds, but these don’t guarantee to repay you.
You need to go into investing via an innovative finance Isa with your eyes wide open: Unlike a cash Isa, the FSCS doesn’t protect your money in an innovative Isa. So, if the person or institution fails to repay your initial sum then you’ll be left out of pocket.
Read more: “My innovative Isa makes me feel like I’m in Dragon’s Den”
One of the requirements to open an Isa is to be 18 or older. Anyone under this age can instead open a junior Isa, with their parents or guardian’s permission, and make use of a £9,000 annual allowance.
Besides this, the makeup is the same and you’ll have the choice to invest your money or let it earn interest in cash.
Research undertaken by Interactive Investor, an investing platform, found that parents who choose to invest in a junior stocks and shares Isa tend to passively manage their children’s investments.
In total, parents made less than two active trades per year – four times less than the figure for a regular stocks and shares Isa.
“This perhaps reflects the popularity of diversified funds and investment trusts with solid track records of generating strong returns over the long term,” said Myron Jobson, Senior Personal Finance Analyst at Interactive Investor.
Read more: The best junior Isas
FAQ
Can I have a cash Isa and a stocks and shares Isa at the same time?
Yes. you can open both Isas in the same tax year.
Can I transfer my cash Isa to a stocks and shares Isa and vice versa?
Yes, and you can also transfer your Isa from one provider to another.
Is a bed and Isa worth it?
If you have savings or investments elsewhere it could be a good idea to move them to an Isa – if your allowance permits. Our guide explains the concept of bed and Isa in more detail.
Important information
Some of the products promoted are from our affiliate partners from whom we receive compensation. While we aim to feature some of the best products available, we cannot review every product on the market.
