How to choose the right ISA before the end of the tax year
How to choose the right ISA this tax season
The end of the ISA tax year is rapidly approaching, and both savers and investors are rushing to take advantage of their annual ISA allowance. The government recently announced plans to reduce the Cash ISA allowance from its current £20,000 to £12,000, but this change will not come into effect until next year.
In the meantime, UK taxpayers can choose to allocate up to £20,000 per year into a range of ISA products. But what is actually available?
Cash ISA
Easily the most popular type of ISA. In the 2023/24 ISA tax year, almost 10 million people held cash ISA accounts1, making them by far the most popular ISA wrappers on the market. Most banks, building societies and investment platforms now offer Cash ISA accounts, with returns closely linked with the base rate. At the time of writing, the UK’s base rate is 3.75% and the top cash ISA rate was around 4.5%2.
Cash ISAs are popular for their perceived safety – they are protected under the Financial Services Compensation Scheme (FSCS) which means that any Cash ISA loss of up to £120,000 will be protected should the Cash ISA provider fail.
However, while Cash ISAs offer a certain amount of security and predictability, the returns are relatively low. If Cash ISA returns are unable to keep pace with the rate of inflation, this means that your money loses its spending power in real time.
Stocks and Shares ISA
The second most popular type of ISA had more than four million subscribers in 2023/24. This ISA allows taxpayers to invest tax-free in assets such as shares, bonds, and funds.
Unlike a Cash ISA, the value of investments can go down as well as up, but the idea is that over the long term, a Stocks and Shares ISA may offer higher growth potential. However, if you are using this ISA to choose individual stocks and shares, you run the risk of making a loss on a bad investment. Furthermore, market volatility can drag down the value of any investment portfolio and quickly. To maximise the value of a Stocks and Shares ISA it is best to maintain a diversified portfolio of assets and to avoid falling into a day trader mindset and obsessively monitoring the market for opportunities or changes.
Lifetime ISA
This ISA is designed to help people either buy their first home or to save for their retirement. You can only open a Lifetime ISA aged 18 to 39, and you can only contribute until you are 50 years old. The government will add a 25% bonus on contributions, up to a limit.
But there are a few rules. You can only contribute up to £4,000 per year, and this £4,000 counts towards the £20,000 overall annual ISA allowance. It can only be withdrawn to purchase your first home, or to finance your retirement.
Innovative Finance ISA (IFIS
This is arguably the fastest-growing type of ISA account in the UK. The IFISA is a newer form of ISA that allows tax-free investment in peer-to-peer (P2P) lending and property-backed lending platforms such as Loanpad, and private credit-style loan products such as long-term asset funds (LTAFs).
Instead of earning interest from a bank, you earn returns from the borrowers who are repaying their loans. This ISA is popular with investors looking for income and portfolio diversificationand offers an opportunity to support home-grown entrepreneurs and property developers. The returns are typically fixed across the term of the loan and can range from 5% to 15%, depending on the platform chosen and the level of risk.
Unlike Cash ISAs, IFISAs are not protected by FSCS, and understanding the platform’s underlying loan security (such as property valuations and loan-to-value ratios) is crucial.
Junior ISA
This is an ISA for children under 18, which is managed by a parent or guardian until the child turns 18. For the 2025/26 ISA tax year it has a limit of £9,000 per year. Contributions can be made by anyone, including parents, guardians or simply well-wishers.
All of the money invested and saved in a Junior ISA belongs to the child and can’t be accessed until they are 18. This is a great option if you want to set up a nest egg for a child or shelter an inheritance from over-taxation.
Choosing an ISA
With so many types of ISA to choose from, the investing and savings space can seem daunting. But there is no reason why you can’t invest across each type of ISA structure. An ISA comparison can help you understand how different ISAs fit together within your overall strategy. Diversification is the friend of the savvy investor, and by spreading your money across a variety of different types of ISA, you may be able to protect yourself from any sudden market shocks.
The most important thing is not trying to choose the ‘perfect’ ISA – it’s about using your ISA allowance consistently and aligning your ISA strategy with your goals, timeline and risk comfort.
| Don’t invest unless you’re prepared to lose money. This is a high-risk investment. You may not be able to access your money easily and are unlikely to be protected if something goes wrong. Take 2 mins to learn more. |
