Why Innovative Finance ISAs (IFISAs) could be the big winners of the Autumn Budget

After months of rumours that Chancellor Rachel Reeves planned to slash the Cash ISA allowance as low as £5,000 per year, she finally clarified the government’s plans for the tax-free savings account during the Autumn Statement.

From 6 April 2027, the annual tax-free allowance for a Cash ISA will be cut from £20,000 to just £12,000 for most savers under 65. However, the overall ISA limit will remain at £20,000, leaving taxpayers with £8,000 which can be invested in either a Stocks & Shares ISA or an Innovative Finance ISA (IFISA).

This is all part of the Chancellor’s plan to generate economic growth by encouraging savers to become investors.

So why should savers consider the Innovative Finance ISA over a Stocks and Shares ISA?

As of April 2027, former savers will have a choice. Invest in the stock market or consider allocating into an IFISA.

Investing in a stocks and shares ISA offers diversity – there are more than 1,500 companies listed on the London Stock Exchange alone, covering every corner of the economy. It is possible to build a risk-managed, highly diverse portfolio of stocks and shares which can deliver good returns over time.

But the stock market is also subject to macro-economic shocks and market volatility, which could result in capital losses. Due to this volatility risk, it is particularly important to choose the right time to withdraw your money. For people using their ISA allowance to save towards a pension, this could mean delaying a withdrawal for months or even years while waiting for their portfolio to stabilise.

Innovative Finance ISAs can be a much less volatile option. An IFISA allows you to invest up to £20,000 per financial year in peer-to-peer loans or other alternative debt-based securities. Instead of holding cash or traditional investments, your money is lent to individuals or businesses through approved platforms. Investors collect their returns on a daily, weekly, monthly or quarterly basis, depending on the platform chosen.

As long as the underlying loans perform as expected, these monthly returns should be the same for the duration of the loan, when investors have the option to cash out or reinvest their capital into a new loan. Some platforms also offer the opportunity to access your capital early. For example, Loanpad offers an IFISA-eligible Daily Access account which allows investors to add or withdraw money from their account on a day-to-day basis (subject to liquidity).

For former savers, the relative stability and liquidity of an Innovative Finance ISA could appeal more than a stocks and shares ISA, but there are risks involved. The main risk in P2P lending is that a borrower defaults on their repayments, placing investor capital at risk.

Furthermore, IFISA investments are not covered by the Financial Services Compensation Scheme (FSCS) so any losses will not be recoverable. This is why it is so important for investors to choose a platform with a long track record, experienced management team and a strong risk management plan.

Loanpad manages risk by taking property as collateral on every loan, with a very low loan-to-value. This means that in the event of a borrower default, the property can be sold to recoup investor capital. Lending partners also co-invest on every loan alongside our investors, and take the first loss on any potential default, further protecting investor capital. We also carry out intensive due diligence on all loans throughout the duration of the loan term.

While past performance is no guarantee of future success, our risk management processes mean that we have maintained a zero- loss rate for our investors since inception.

Investing in British economic growth

Innovative Finance ISAs allow investors to directly support British businesses and entrepreneurs by providing them with funding that is increasingly hard to secure from banks. In this way, investing in an IFISA meets the government’s goal of supporting the British economy and boosting innovation.

The government’s new ISA regime is nudging investors towards investing and away from the traditional safe haven of cash savings. For lifelong savers who are considering investing for the first time, the IFISA can be a less volatile option than a stocks and shares ISA, while delivering higher returns than cash savings products.

Loanpad’s Innovative Finance ISA accounts are currently targeting returns of five or six per cent, depending on the type of account chosen. Learn more about our ISA offerings here.