Cash ISA vs stocks and shares ISA

I'm all for a good ol' fashioned showdown. But when it comes to the cash ISA vs stocks and shares ISA duel, it shouldn't be a fight.

It's not an either-or situation.

You can hold a cash ISA and a stocks and shares ISA at the same time, and they don't even have to be with the same provider.

But just because you can have both doesn't necessarily mean you should. Depending on your individual circumstances and financial goals, one of the two ISAs might make more sense for you. And with changes on the way for cash ISA allowances, it could be the perfect time to consider whether a cash ISA or stocks and shares ISA is right for you.

What is a stocks and shares ISA?

A stocks and shares ISA is sometimes called an investment ISA. That's because you use this ISA to make investments in a tax-efficient way.

In a stocks and shares ISA, you won't pay personal income tax on dividends or interest - no matter your own income tax rate. You also won't pay capital gains tax if you have any gains from investments.

As an investor, you've got a smorgasbord of investment options within your stocks and shares ISA. For example, with Freetrade’s stocks and shares ISA you can invest in:

• Stocks
• Bonds
• Exchange-traded funds (ETFs)
• Mutual funds
• Investment trusts
• Real estate investment trusts (REITs)
• Crypto ETNs (until April 2026)
• Treasury bills

Click the links to learn more about these different types of investments.

It's important not to put all your eggs in one basket when you invest. Diversifying your investments will help you spread risk across multiple assets as opposed to relying on one, often a sensible strategy to hit your personal financial objectives.

Can you hold cash in a stocks and shares ISA?

You can still hold cash in a stocks and shares ISA too. However, it might not be the best home for it. Cash can be a drag on your performance in a portfolio of investments.

If you have cash savings in a stocks and shares ISA, it's probably sitting there waiting for a ride to its final destination. After all, a stocks and shares ISA is for making tax-efficient investments, so you're depositing money into that account with the intent of buying and selling shares.

If you are unsure about what to do with cash in your ISA account, low-risk short-term investments like money market funds offer a sensible solution. They generally offer slightly higher returns than cash savings and quick access, though they are slightly higher risk. Learn more with our guide to money market funds.

What’s a cash ISA?

A cash ISA is one type of savings account where you might consider depositing your savings if you don't want to invest them.

But the return on a cash ISA isn't always great, particularly if you consider the impact of inflation in recent years. UK inflation reached a high of 11.1% in 2022, and, though it has fallen considerably since, continues to consistently exceed the government’s 2% target.

Meanwhile, cash ISA interest rates peaked at less than 6% in the last few years, with even the best rates having since declined. This means that cash ISA users can sometimes lose purchasing power, despite earning interest on their savings.

That said, if you have a short time horizon (or you're not yet sure of what that horizon even is) with the main goal of preserving your capital, they could be right for you. 

If you want that money to grow, then a stocks and shares ISA is probably more up your street. However, there is always the potential downside of the value of your investments going down as well as up. Whenever you invest, your capital is at risk.

The main benefit of a cash ISA is that your savings will earn interest without having to pay tax. This is the main way it differs from a traditional savings account (or, a non-ISA savings account).

But many wouldn't actually pay tax on interest from a regular savings account to begin with, because of their Personal Savings Allowance (PSA).

With your PSA, depending on your Income Tax band, you might be eligible to earn £1,000 of interest without having to pay tax on it. But that tax allowance only applies to Basic rate income tax payers, and tax rules are subject to change and your own personal circumstances.

The difference between a stocks and shares ISA and a cash ISA

Now that you've got a sense of how the two accounts differ, you may be humming and hawing over which to choose. Technically, you can actually have both a cash ISA and a stocks and shares ISA at the same time. You can even pay into both ISA accounts in the same tax year so long as you don’t go over that total annual allowance.

But each ISA serves a different purpose, and because your tax year contribution's maximum allowance is split across all of your ISAs, it's wise to prioritise a certain account according to your financial objectives. Consider how to make the most of your annual ISA allowance, and how to use ISAs to avoid different taxes you might face. 

ISA allowance changes

The 2025/26 tax year ends on 6 April 2026, with the new 2026/27 tax year then running through to 5 April 2027. This tax year has a £20,000 ISA contribution limit, unchanged from the previous year. 

However, ISA rules have come in for a shake-up that could impact how you choose to use your allowance. From April 2027, annual cash ISA contributions will be capped at £12,000. However, the stocks and shares ISA allowance will remain the same at £20,000.

If you are a cautious saver, you are likely to be put out at this news. But it does not need to deter you from using your full ISA allowance. That’s because stocks and shares ISAs often provide access to investments with similarities to cash savings.

For example, Freetrade’s investment universe includes several money market funds, which offer a low level of risk and returns that are often higher than cash savings. 

Using investments like these within a stocks and shares ISA may allow you to continue utilising your full annual ISA allowance, all while enjoying similar benefits to those offered by a cash ISA. 

However, complicating matters further, the government plans to exclude certain “cash-like” investments from stocks and shares ISA eligibility from April 2027. This could include the likes of money market funds, but we will have to wait to find out. 

For now, money market funds can still provide would-be cash savers with a stepping stone into stocks and shares ISA investing. And with raw cash savings under the cosh, it could be wise to familiarise yourself with investing now rather than later.

If you haven’t thought about investing tax efficiently, then it might be wise to at least work out if a tax-efficient account like a stocks and shares ISA or self-invested personal pension (SIPP) could help now more than ever.

ISA tax considerations

The key incentive to use ISAs, whether they are stocks and shares ISAs or cash ISAs, is that they are tax-efficient. This means you will not pay tax on money made in these accounts, whether that money is made through interest, dividends, or capital gains.

If you aren’t investing using a stocks and shares ISA or a longer-term tax-efficient account like a Self Invested Personal Pension (SIPP), you could end up paying more tax than necessary.

Often, investors will opt for the cheapest investment account out there and on the surface that makes sense. Why pay more than you have to? But investing solely in a general investment account (GIA) because it has a lower headline cost than an ISA risks missing the whole point, tax.

So, let’s take a look at the relevant taxes and allowances for savers and investors.

Capital gains tax

Capital gains tax (CGT) applies when you sell an investment, such as units of stock, for more than you paid.

Your annual CGT allowance is £3,000 for 2025/26 and the same again for 2026/27. This means you can receive capital gains of £3,000 before you need to start paying CGT.

The rate you pay depends on your income-tax band:

• 10% for basic-rate taxpayers
• 20% for higher/additional-rate taxpayers
• 18%/24% for residential property gains

You can use capital losses to offset gains.

Dividend tax

This is paid on dividend income, which is where profits are distributed among investors. 

Your annual dividend allowance is £500, meaning dividend income that exceeds this level will be taxed.

Dividend tax rates for the current and next tax years:

• 8.75% (basic rate) / Up to 10.75% in 2026/27
• 33.75% (higher rate) / Up to 35.75% in 2026/27
• 39.35% (additional rate)

Learn more with our explainer of the dividend allowance.

Income tax on interest

You pay income tax on interest from:

• Cash in investment accounts
• Corporate bonds
• Government bonds (gilts)

You have a personal savings allowance, which allows you to earn a certain amount of interest before you need to pay tax on it. For basic-rate taxpayers, this is £1,000, though it drops to £500 for higher-rate taxpayers and £0 for additional-rate payers.

In addition, the Starting Rate for Savings (up to £5,000) can apply if your income is below £17,570.

At the moment, the tax you pay on interest is the same as your usual rate of income tax. However, tax on savings is on course to increase by 2% in 2027/28. This means the basic rate is set to rise from 20% to 22%, the higher rate from 40% to 42%, and the additional rate will climb from 45% to 47%.

Should I save my cash or invest it?

Putting your cash in a cash ISA may seem like a safe way to protect your money. Though if you're looking to grow your savings and beat inflation, cash is unlikely to be the answer.

When you invest in stocks and shares, you're putting your money to work. This is why your long-term (and by that we mean at least a five-year period) investment return with a stocks and shares ISA could be higher than with a cash ISA.

So let's say you want to save some money, but you plan to take it out in the next few months. In that case, it could make sense to keep the cash in a general savings account rather than a cash ISA, where your contributions would eat away at your total allowance. Its value is also unlikely to fluctuate in the same way as any invested money in a stocks and shares ISA could.

The trade-off is normally that you have to accept a lower rate of interest on your savings in exchange for that low level of risk on cash, when compared to the S&P 500, for example.

If you are still unsure, check our guide to saving vs investing.

Cash ISA or stocks and shares ISA?

To bring it right back around to where we started, cash ISAs and stocks and shares ISAs both have their place.

You could keep the money that you want to save and access in the short term in a cash ISA. But if you’re ready to take some investment risk and want to grow that money (and hopefully combat the effects of inflation) in a tax-efficient way, then a stocks and shares ISA might be better suited for your needs.

That’s because, unless the interest rate you receive on your cash ISA is higher than the rate of inflation, your money will be worth less in the future.

Remember, there are also cash-like investment options (such as money market funds) within a stocks and shares ISA. 

Cash ISA vs stocks and shares ISA - FAQs

Are stocks and shares ISAs risky?

While your return is likely to be greater with a stocks and shares ISA over the long term, that also means the level of risk is greater too. 

That’s because you’re investing in the stock market, which means your return could go down or up. There’s a risk that you lose all of the capital that you invest. This would be much less likely in the case of a cash ISA. 

If your ISA provider went under, your ISA may be covered by the Financial Services Compensation Scheme (FSCS) up to a maximum value of £120,000. This is the case for both cash ISAs and stocks and shares ISAs too. 

It is important to stress that this protection only applies if your provider goes under. If a company you have invested in, say by purchasing shares through your ISA, goes under, the FSCS does not offer protection.

How to transfer a cash ISA to stocks and shares ISA

The most important consideration when opening a stocks and shares ISA is whether it's the right decision for you. There are a number of factors to consider when assessing this, including your own financial goals, time horizon and tolerance for risk.

If you then decide you'd like to take the cash out of your cash ISA and invest it in your stocks and shares ISA instead, then it's entirely possible and relatively easy to do.

That's good news, because when you transfer money between your ISAs, you won't lose your allowance. But if you close one ISA and open another in a given tax year, your allowance won't reset. So whatever you may have deposited earlier on in the year cannot be re-added to your new ISA.

For more information on the ins and outs of the process, we've got you covered with our article all about ISA transfers.

Can I pay into a cash ISA and a stocks and shares ISA in the same year?

You sure can.

As long as you’re paying into different ISA types, you can pay into multiple accounts in the same tax year. And paying cash into both ISA accounts could be a good way to prepare for your short-term and long-term financial needs. 

If you do pay into a cash ISA and stocks and shares ISA in the same year, bear in mind your £20,000 allowance covers your contributions across both. However, from the start of the 2027/28 tax year, your cash ISA contributions will be capped at £12,000 per year. 

How will inflation impact my savings?

Inflation, or the rising cost of goods, is constantly eroding the value of what we can actually buy in the real world. If the interest earned by your savings is lower than inflation, you will have lost money in real terms. 

This means that, although if you put £1,000 in your 5% savings account and it increases to £1,050 over the course of a year, if inflation for the period is 6% then the value of your savings is actually less than it was when you started.  Savings rates have fluctuated heavily over the years, and can’t necessarily be counted on to rise with inflation.

Interest rates have been very low since the global financial crisis in 2008, though the Bank of England’s base rate currently exceeds inflation.

How can I open an ISA?

If you do decide to open an ISA, remember that the deadline to take advantage of this year’s annual ISA allowance is midnight on the 5th April 2026. If you don’t open and pay into your ISA by then, you won’t be able to take advantage of this year’s £20,000 ISA allowance. 

This is important to keep in mind because you can’t carry forward any unused ISA allowances. If you don’t use it, you’ll lose it.