Cash vs Stocks & Shares ISAs Explained
ISAs are the UK’s simplest tax-free wrapper. For most people, the starting point is a Cash ISA, but many will also be aware of, if not already using, a Stocks & Shares ISA. They broadly operate the same, providing tax-free income and/or gains, but there are other less well-known formats too. These next few posts dive into them and explain the differences.
A quick refresher on ISAs
Every adult in the UK gets an annual ISA allowance. For 2025/26, that allowance is £20,000. Money inside an ISA grows free of income tax, dividend tax, and capital gains tax. You can hold more than one type of ISA, but the combined contributions across them cannot exceed the annual allowance. Transfers between ISAs are allowed and do not affect your limit, provided they are done through the proper transfer process.
ISAs are extremely well embedded into household finances, having been introduced in 1999 to replace older tax wrappers such as the Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs). Over time, the system has been expanded to include several types, but Cash ISAs and Stocks & Shares ISAs remain the most common.
What makes them so good?
If you save £10,000 in a general savings account paying 4% interest, receiving £400 interest per year, a basic-rate taxpayer would ordinarily lose £80 in tax (other exemptions aside). In a Cash ISA paying the same rate, you would keep the full £400.
Cash ISAs explained
A Cash ISA works much like a standard savings account, with the key difference that interest is tax-free.
Types of Cash ISA:
- Easy access: You can withdraw at any time, but rates are usually lower.
- Fixed rate: Your money is locked in for a set term (often 1–5 years) at a higher interest rate.
- Flexible ISA: Lets you withdraw and replace money in the same tax year without using up your allowance.
Cash ISAs are covered by the Financial Services Compensation Scheme (FSCS) up to £85,000 per person, per provider.
As of 2025, top Cash ISA rates are in the 4–5% range depending on the term. These are competitive by historic standards, but future inflation will determine whether your real return holds its value.
Stocks & Shares ISAs explained
A Stocks & Shares ISA is an investment account. You can hold:
- Funds and exchange-traded funds (ETFs)
- Individual company shares
- Bonds and investment trusts
The main appeal is long-term growth. Investments inside the ISA are free of capital gains and dividend tax, but the value can rise and fall in the short term. The Financial Conduct Authority (FCA) suggests investing for at least five years to ride out market swings.
Example: £10,000 in a global equity tracker could grow to roughly £17,000 over 10 years if markets deliver 5% a year. In a Cash ISA at 3%, the same sum would reach just over £13,400. The equity route involves much greater short-term swings. In the equity tracker you need to ride out the lows without pulling out your money.
Cash vs Stocks & Shares ISAs: side by side
| Feature | Cash ISA | Stocks & Shares ISA |
|---|---|---|
| Access | Easy or fixed terms | Withdraw anytime (may take days) |
| Risk | Low, FSCS protected | Market risk, investments can fall |
| Protection | FSCS £85k per provider | No FSCS on investments themselves |
| Typical returns | 2–5% interest, varies over time | 5–7% per year long term (not guaranteed) |
| Best for | Emergency funds, short-term goals | Retirement, long-term growth |
Cash ISAs provide certainty but risk losing ground to inflation. Stocks & Shares ISAs offer better potential growth but carry more volatility.
Practical considerations
You do not need to choose one or the other. Many people split their ISA allowance between the two, using Cash ISAs for short-term needs and Stocks & Shares ISAs for longer-term goals. With a £20,000 annual allowance, you might keep £5,000 in a Cash ISA for emergencies and invest £15,000 in a Stocks & Shares ISA for long-term growth.
Transfers between types are possible without using up your allowance, but you must use the official provider transfer process.
Conclusion
Both Cash and Stocks & Shares ISAs have a role. Cash offers stability and easy access. Stocks & Shares provide growth potential but with volatility. The right mix depends on your goals and time horizon, and for many savers a blend makes sense.
In the next post in this ISA series, we will look at Special ISAs such as the Lifetime ISA and Junior ISA, which offer targeted benefits for first homes, retirement, and children’s savings.