What Is an ISA?
An ISA — Individual Savings Account — is a government-backed account that lets you save or invest up to £20,000 per tax year completely free of UK income tax and Capital Gains Tax. Any interest, dividends, or gains earned inside an ISA are yours to keep in full, forever.
Every UK adult over 18 gets a fresh £20,000 ISA allowance on 6 April each year. Unused allowance cannot be carried forward — if you do not use it, you lose it. Couples can shelter up to £40,000 per year between them.
There are four main types of ISA available to UK adults:
- Cash ISA — works like a savings account, earns interest tax-free
- Stocks and Shares ISA — invest in funds, ETFs, and shares tax-free
- Lifetime ISA (LISA) — for first-time buyers and retirement, with a 25% government bonus
- Innovative Finance ISA — for peer-to-peer lending (higher risk, niche product)
This guide focuses on the two most commonly used: the Cash ISA and the Stocks and Shares ISA.
Cash ISA vs Stocks & Shares ISA: Side-by-Side
| Feature | Cash ISA | Stocks & Shares ISA |
|---|---|---|
| What it holds | Cash savings | Funds, ETFs, shares, bonds |
| Annual allowance | Up to £20,000 | Up to £20,000 |
| Tax on gains | None | None |
| Tax on interest/dividends | None | None |
| Typical return (2025) | 4.5%–5.1% (easy access) | 4%–10% (long-run historic) |
| Risk to capital | Very low (FSCS protected up to £85k) | Medium — value can fall |
| Recommended for | Short-term goals (1–5 years) | Long-term goals (5+ years) |
| Inflation protection | Partial — rates can lag inflation | Good — equities historically outpace inflation |
| Access to money | Easy (easy-access accounts) | Usually within a few days |
Cash ISA: What You Need to Know in 2025
Cash ISA at a Glance
A Cash ISA is essentially a savings account where the interest is paid tax-free. In 2025, the best easy-access Cash ISAs are paying around 4.5%–5.1% AER, while fixed-rate Cash ISAs for longer terms can offer slightly more.
For most basic-rate taxpayers, the tax benefit of a Cash ISA is actually modest right now — the Personal Savings Allowance already lets basic-rate taxpayers earn £1,000 in interest tax-free in regular accounts. Higher-rate taxpayers get a £500 allowance. Only if you have a very large savings pot will you be paying tax on cash interest outside an ISA.
That said, Cash ISAs remain useful for: short-term goals (a house deposit, a wedding, a car), emergency funds you want to keep separate, or older savers who want capital security above all else.
Stocks & Shares ISA: What You Need to Know in 2025
Stocks & Shares ISA at a Glance
A Stocks and Shares ISA lets you invest in the stock market — via index funds, ETFs, individual shares, or bonds — and keep all the returns tax-free. This is where the real power of compound interest is unleashed over the long term.
Historically, a globally diversified index fund has returned approximately 7–10% per year before inflation (or 4–7% after inflation). This comfortably beats the best savings rates over the long run, though it comes with the risk that values can fall in the short term.
The tax-free nature of the ISA is particularly powerful here. A 7% return in a taxable account is reduced by Capital Gains Tax when you sell (currently 18% for basic-rate, 24% for higher-rate taxpayers on investments) and by dividend tax on income. Inside an ISA, you keep every penny.
The Long-Term Numbers: Why Stocks Win Over Time
This is the most important section of this guide. Let us compare a Cash ISA and a Stocks and Shares ISA with identical contributions over different time horizons, using conservative assumptions (5% for cash, 7% for equities):
Over shorter periods, the difference is smaller and cash is safer. Over longer periods — especially 10 years or more — equities have historically won in the vast majority of cases. Academic research shows that over any 10-year rolling period since 1900, global equities have outperformed cash savings in over 90% of cases.
The key insight is that the stock market is risky in the short term but considerably safer in the long term. A market crash feels devastating in the moment but is typically recovered within a few years. Over 20 or 30 years, the trajectory has always been upward.
How to Decide: A Simple Framework
The decision comes down to one question: When will you need the money?
- Need it within 1–3 years? → Cash ISA. Do not put money in equities you cannot afford to leave invested if the market falls.
- Won't need it for 5+ years? → Stocks & Shares ISA invested in a global index fund.
- Somewhere in between? → Split your £20,000 allowance. Use a Cash ISA for the portion you might need sooner, and a Stocks & Shares ISA for the rest.
- First-time buyer under 40? → Consider a Lifetime ISA first (up to £4,000/year with a 25% government bonus), then use remaining allowance for a Stocks & Shares ISA.
A Cash ISA for your emergency fund and short-term goals, plus a Stocks & Shares ISA for long-term wealth building. You do not have to choose one or the other — the £20,000 allowance can be split between them in any proportion.
Best Stocks & Shares ISA Platforms in 2025
Platform Comparison
- Vanguard Investor: 0.15% platform fee (capped at £375/year). Best for holding Vanguard's own range of index funds. Excellent for beginners. Minimum £500 lump sum or £100/month.
- InvestEngine: 0% platform fee for DIY portfolios. Only offers ETFs (not OEICs like Vanguard's funds). Minimum £100. Best value platform for ETF investors.
- Hargreaves Lansdown: 0.45% platform fee (up to £250,000). Most comprehensive platform with the widest fund range. Higher fees but excellent customer service. Good for larger, more complex portfolios.
- AJ Bell: 0.25% platform fee. Good middle ground between cost and range. Minimum £500 or £25/month.
- Moneybox: 0.45% platform fee. Round-up investing feature. Best for people who want to start very small (from £1). Slightly higher fees but great UX.
Our Verdict
For most UK investors under 50 with a long time horizon, a Stocks and Shares ISA invested in a global index fund will generate significantly more wealth than a Cash ISA over time. The evidence is overwhelming and the maths is compelling.
However, the Cash ISA has a legitimate role for short-term savings and for investors who genuinely cannot tolerate the thought of their portfolio falling in value. The answer for most people is not one or the other — it is both, used for different purposes.
Use our free compound interest calculator to model your specific situation and see exactly how both options could grow over your chosen time frame.