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Cash ISA v Stocks and Shares ISA: Which is right for you?

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Individual Savings accounts, more commonly known as ISAs, were introduced in April 1999. They offer a tax-efficient way to save and invest for the future.

In 2025/26, you can contribute up to £20,000 to one or multiple ISA accounts without incurring Income Tax or Capital Gains Tax on any interest or returns you earn.

According to the latest government figures, around 12.4 million Adult ISA accounts were subscribed to in 2022/23, up from 11.8 million in 2021/22. However, while the share of Cash ISAs rose to 63.2%, a growth of 2.5% from 2021/22, the number subscribing to Stocks and Shares ISAs fell by around 126,000.

Indeed, research by The Investment Association and Opinium has revealed that one in four UK adults have “never heard” of a Stocks and Shares ISA.

Keep reading to learn how both types of ISA work and find out why spreading your wealth across Cash ISAs and Stocks and Shares ISAs could help you progress towards your financial goals.

A Cash ISA is a savings account that allows you to earn tax-free interest

A Cash ISA works like many other savings accounts – you deposit money and earn interest on the amount held in your account. The key difference is that any interest you earn is tax-free, provided that your total contributions across all ISA accounts do not exceed £20,000 (2025/26).

In contrast, you’ll usually pay Income Tax at your marginal rate on any savings you hold outside an ISA wrapper, if they exceed certain thresholds.

You can choose between different types of Cash ISA, depending on your needs and goals. There are four main adult Cash ISAs:

  • Easy access Cash ISAsAllow you to deposit and withdraw funds whenever you need to without incurring a penalty. However, interest rates are typically low.
  • Fixed-rate Cash ISAs Pays a guaranteed interest rate for a fixed term, usually between one and five years. If you access your money early, you could be charged a penalty fee.
  • Notice Cash ISAsYou agree to give a specific number of days’ notice before withdrawing money. In exchange, you could potentially receive higher interest rates than you might get with an easy access Cash ISA.
  • Regular saver Cash ISA You commit to paying a fixed amount into your account every month. This type of ISA typically offers a higher interest rate than standard savings accounts.

Is a Cash ISA right for you?

Cash ISAs are protected by the Financial Services Compensation Scheme (FSCS) up to £85,000 per authorised provider. As such, they are not only tax-efficient but also low risk.

Additionally, you can choose an account that meets your specific needs and savings goals. For example, if flexibility is paramount, you might opt for a Cash ISA that offers instant access. Alternatively, if you can afford to lock your money away for several years, you could benefit from higher interest rates by choosing a fixed-rate ISA.

However, returns on Cash ISAs are typically lower than Stocks and Shares ISAs. Research published by IFA Magazine found that Cash ISA savers who used their full annual ISA allowance every year since the product launched in 1999 may have lost out on £134,000 compared to those who invested in UK shares.

What’s more, if interest rates fall below inflation, the real value of your savings could be eroded over time.

A Stocks and Shares ISA lets you invest your wealth in a tax-free wrapper

This type of ISA allows you to invest in a variety of stock market assets, such as company shares, bonds, and investment funds.

You won’t pay tax on any returns you make, provided your total contributions across all your ISAs do not exceed the annual ISA allowance.

There are several types of adult Stocks and Shares ISAs which fall broadly into two categories:

  • Self-select Stocks and Shares ISAs – You can choose and manage your own investments. This is a hands-on approach that allows you full control over buying, selling, and portfolio decisions. If you’re an experienced investor, this approach might allow you to keep ongoing costs to a minimum. However, it may require a significant time commitment, and you’ll need to be confident about making decisions independently.
  • Managed Stocks and Shares ISAs – Your investments will be managed by professional fund managers or robo-advisers. If you’re a beginner or have limited time to oversee your portfolio, this may sound attractive. However, there are likely to be fees to pay for this service, in addition to standard trading charges.

Is a Stocks and Shares ISA right for you?

Historically, Stocks and Shares ISAs have delivered higher average returns than Cash ISAs. Figures published by Moneyfacts show that between 1 February 2024 and 1 February 2025, the average Cash ISA rate was 3.8%, while the average Stocks and Shares ISA grew by 11.86%.

The longer you remain invested, the more opportunity your wealth has to benefit from compounding – earning returns on returns.

However, with the potential for higher returns comes the risk of losing some or all of the money you invest. You’ll also need to budget for investment fees and charges.

As such, Stocks and Shares ISAs may seem complicated and daunting to novice investors acting without the support and guidance of a financial professional.

There’s no need to choose one or the other type of ISA; You could invest in both

Investing in both Cash ISAs and Stocks and Shares ISAs could allow you to reap the benefits of each type of account and help you achieve different financial goals.

For example, an easy access Cash ISA might be ideal for building an emergency fund and catering to short-term needs. While a Stocks and Shares ISA could help you progress towards your long-term goals, such as retirement.

Yet, it’s important to note that your annual ISA allowance of £20,000 applies to the total amount you pay into all ISA accounts in the 2025/26 tax year. So, if you want to invest in both types of ISA, you’ll need to think carefully about how to split your savings and investments to keep them tax-efficient.

Get in touch

If you’re not sure how to make the most of tax-efficient savings options or you’d like help getting started with Stocks and Shares ISAs, we can help.

Please email hello@sovereign-ifa.co.uk or call us on 01454 416653.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.

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