Cash ISA vs stocks and shares ISA: what's the difference?
Opening an individual savings account (ISA)? Discover the difference between a cash ISA and a stocks and shares ISA, and which might be right for you, here.
This guide reveals the key differences between the two most popular types of individual savings accounts (ISAs), helping you to decide between a stocks and shares and cash ISA.
Cash ISAs and stocks and shares ISAs are the most common types of ISA, and deciding which might suit you best can be difficult.
Here, we explore both thoroughly, detailing the pros and cons of each.
A cash ISA is a savings account that pays you tax-free interest on your money.
When you open a stocks and shares ISA, your money is invested in the stock market.
In the last 10 years, the average return on stocks and shares ISAs has been 9.64% annually, versus 1.21% for lower-risk cash ISAs.
What is a cash ISA?
A cash ISA is a savings account for an individual that pays you tax-free interest on your money.
There is no limit on the number of ISAs you can open except for lifetime and junior ISAs (as of April 2024), and the overall limit for contributions is £20,000.
At the moment, you can choose whether to hold your entire £20,000 in cash, stocks and shares or a mixture of both.
If you choose to open a cash ISA and a stocks and shares ISA, you’ll just need to ensure you don’t exceed the £20,000 overall limit.
This will become more complex from April 2027.
The UK government is planning to restrict the amount you can put into a cash ISA to 12,000 of your total entitlement, with a further £8,000 allowance available for stocks and shares.
However, if you are over 65, you will still be able to use your entire ISA allowance for cash savings.
The full details of the change will be set out in due course. For now, you can find out more here.
What are the different types of cash ISAs?
Most cash ISAs are ‘flexible’ ISAs, so you can withdraw money from your ISA and replace it within the same tax year to guarantee you get the total possible amount of tax-free interest.
However, it is up to an individual bank or building society whether it offers a flexible ISA, so you should check before opening or switching to a new product if this is important to you.
Fixed-rate ISAs can offer competitive rates in return for you leaving your cash in the account for longer.
If you choose one of these, it’s vital to consider whether you’re willing to lock up your savings for a set amount of time before committing.
If you need the money within the fixed period, you may be charged a penalty to access it.
Simply put, if you’re over 18 and a UK resident, you can open a cash ISA and earn tax-free interest on up to £20,000 a year.
If you’re not ready to start actively investing your money and you’d like to keep your level of risk low while maximising your savings as you earn them, a cash ISA might be a better option than a stocks and shares ISA.
We'll now look at the pros and cons to consider.
The pros of a cash ISA
Tax-free interest on your savings.
No risk that the value of your savings will go down.
Anyone over the age of 18 can open a cash ISA.
People under the age of 18 can open a cash junior ISA.
ISAs are portable, so you can choose to transfer your cash ISA into a stocks and shares ISA (or the other way around) at any time.
Cash ISAs come with fewer extra charges compared to stocks and shares ISAs.
The cons of a cash ISA
High introductory interest rates can fall quickly, leaving you with lower interest rates.
Fixed-rate ISAs may lock your money away for a set period of time and can cost you a penalty if you suddenly need the money.
ISAs have a capped contribution limit of £20,000 per year, limiting how much interest you can accrue. This will fall to £12,000 for cash ISAs from April 2027.
If the interest rate you receive is lower than the rate of inflation, your money will lose value in real terms.
ISAs can’t be held by two people; they are for individuals only.
If your ISA is inherited when you pass away, it may be subject to inheritance tax, depending on the beneficiary.
Both ISAs and savings accounts offer valuable ways to manage and grow your money, each with distinct benefits and limitations.
ISAs provide tax-free advantages and are suitable for larger savings, while savings accounts offer flexibility and accessibility. Some ISAs are flexible too, but you must remain within your annual limits.
Learn more: ISAs vs savings accounts, which is better for you?
To help you decide if this type of account is right for you, here is a quick summary of the main pros and cons of a cash ISA:
| Pros | Cons |
|---|---|
| The interest you earn on your savings is tax-free. | High introductory interest rates can drop, leaving you with lower returns. |
| There is no risk of the value of your savings decreasing. | Fixed-rate ISAs may lock your money away, with penalties for early withdrawal. |
| Junior ISAs are available for those under 18. | The annual contribution limit is capped, limiting potential interest. |
| You can transfer your cash ISA to a stocks and shares ISA at any time. | If the interest rate is below inflation, your money loses real-term value. |
| They generally have fewer charges than stocks and shares ISAs. | If your ISA is inherited, it may be subject to inheritance tax. |
What is a stocks and shares ISA?
A stocks and shares ISA is, in some ways, similar to a cash ISA, but there are important differences.
If you’re over 18 and a UK resident for tax purposes, you can open a stocks and shares ISA. Similarly to a cash ISA, you can open more than one.
As mentioned above, the annual contribution limit is £20,000 across all the ISAs you have open, though this will change in April 2027.
How does a stocks and shares ISA work?
When you open a stocks and shares ISA, your money is invested in the stock market. You can either invest in funds or do your own research and buy your own stocks.
Stocks are a type of financial security traded on the stock exchange.
They represent shares of ownership in a publicly traded company and can be a good investment for people who have the time to watch their money grow.
While they have an increased chance of long-term rewards, they also come with an increased level of risk, and these factors must be appropriately balanced.
As well as shares, you can also hold other assets such as bonds and government debt in a stocks and shares ISA.
What is the average stocks and shares ISA return?
To contextualise the increased chance of better returns, in the last 10 years, the average return on stocks and shares ISAs has been 6.79% annually, compared to 1.79% for lower-risk cash ISAs, according to Moneyfacts.
In the year to November 2025, the average stocks and shares ISA returned 15.19% and the average cash ISA 3.77%
The year before, the average stocks and shares ISA gained 24.11%, while the average cash ISA gained 3.88%.
There are no guarantees that stocks and shares ISAs will outperform their cash cousins, and no guarantee that you won’t lose money when investing, as your nest egg can fall as well as rise.
Here are the pros and cons to consider.
The pros of a stocks and shares ISA
Any money you gain from your investments is tax-free.
Stocks and shares ISAs historically tend to provide a better return on investment than cash ISAs.
Anyone over the age of 18 can open a stocks and shares ISA.
Stocks and shares ISAs are a great way to invest in the stock market with support and guidance.
ISAs are portable. You can transfer your cash ISA into a stocks and shares ISA (or the other way around) at any time.
Many different investment options are available, from trusts to corporate bonds.
The cons of a stocks and shares ISA
There’s no guarantee that your ISA will increase in value, and it will always be subject to fluctuating market conditions.
Many account charges apply to stocks and shares ISAs for things like fund management and buying and selling, and these can reduce your gains or compound your losses.
ISAs have a capped contribution limit of £20,000 per year, limiting how much interest you can accrue. This will be split from April 2027, so only £8,000 of it can be in cash.
ISAs can’t be held by two people; they are for individuals only.
If your ISA allowance is inherited when you pass away, it may be subject to inheritance tax, depending on the beneficiary.
To help you decide if this type of account is right for you, here is a quick summary of the main pros and cons of a stocks and shares ISA:
| Pros | Cons |
|---|---|
| Any gains from your investments are tax-free. | The value is subject to market fluctuations and can go down as well as up. |
| Historically, they tend to provide better returns than cash ISAs. | Various account charges can reduce your gains or increase your losses. |
| They offer a supported way to start investing in the stock market. | There's an annual contribution limit of £20,000. |
| You can transfer other ISAs into a stocks and shares ISA, and vice versa. | They can only be held by an individual, not jointly with another person. |
| A wide variety of investment options are available. | If your ISA allowance is inherited, it may be subject to inheritance tax. |
Cash ISA vs stocks and shares ISA, which should I open?
First introduced in 1999 by then-Chancellor, Gordon Brown, ISAs have become increasingly popular in the decades since.
Savers appreciate tax-free interest and gains, and for many, stocks and shares ISAs are a way to become familiar with the stock market.
How to choose the right ISA for you
The ISA that best suits you depends on your investor profile and financial goals.
If you’re risk-averse, you might prefer a cash ISA. If you’re interested in getting a higher return on your investment, you might enjoy growth from a stocks and shares ISA.
If you’re somewhere between the two, you might like to do both.
You could invest, for instance, £15,000 in a cash ISA and the remaining £5,000 of your allowance in a stocks and shares ISA.
When deciding how to split your money between investment and cash, you might want to consider the upcoming restrictions on cash ISAs and maximise your tax-free cash savings while these are still available.
Get expert financial advice
Understanding your financial goals and risk tolerance is key to making the right choice, and a combination of both ISAs may be beneficial for those seeking balance.
Given the complexities of investing and saving for the future, seeking professional financial advice can help you maximise your ISA contributions, navigate market fluctuations, and build a strategy that aligns with your long-term financial aspirations.
If you found this article helpful, you might also find our article on how many ISAs you can have informative, too.
:quality(20))