CASH ISA Vs
STOCKS & SHARES ISA

Cash ISAs and Stocks & Shares ISAs both offer protection from income tax and capital gains tax; however, they contain very different types of financial instruments. This article will explore the differences between the two types of ISAs and outline how both might help you reach your financial goals.

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Cash ISAs and Stocks & Shares ISAs both offer a way to invest tax efficiently, but can be set up to achieve very different investment aims.

Whether you’re looking for the security of guaranteed returns based on a cash account, or the potential for higher growth through investments, developing a better understanding of these two types of ISA will help you make a more informed decision about which one might suit you. This article will outline how they work, the fundamental differences between them, and their respective benefits and limitations.

What Is a Cash ISA?

A Cash ISA is a savings account available in the UK which has favourable tax terms. When you deposit money into a Cash ISA, you earn interest on your savings without paying any income tax on that interest, regardless of your tax band.

Cash ISAs are traditionally thought of as an attractive option for more risk-averse savers who wish to protect their money while earning a steady return. The way that setting up a Cash ISA is similar to opening a standard savings account also appeals to those looking for convenient ways to invest tax-efficiently.

What Is a Stocks & Shares ISA?

A Stocks and Shares ISA, also known as an Investment ISA, is a tax-efficient investment account that allows you to invest in various financial instruments while shielding any returns from both capital gains tax and income tax.

Setting up a Stocks and Shares ISA allows you to hold a wide range of types of assets including: publicly listed shares, government and corporate bonds, investment funds, exchange-traded funds (ETFs), and investment trusts. This flexibility allows you to build a portfolio which has greater risk-return than a Cash ISA.

Key Differences: Cash ISA vs Stocks & Shares ISA

Understanding the fundamental differences between the investment approach of these two ISA types is crucial for making an informed decision. Here’s a comprehensive comparison:

Feature	Cash ISA	Stocks & Shares ISA
Returns	Fixed or variable interest rates	Potential for capital growth and income streams such as dividends and coupons
Risk Level	Low risk — capital protected	Higher risk — value can go down as well as up
Access to Funds	Usually instant or fixed term	Sales of investments may take several days and forced sales can crystalise losses
Investment Choices	None — cash only	Wide range of investments available
Fees	Typically no fees	Platform fees, trading costs, potential fund charges
FSCS Protection	Up to £85,000 per institution	No protection of investment value
Predictability	Tied to interest rates	Returns depend on performance of investments

The most significant difference between the two types of ISAs lies in their risk-return profile.

Cash ISAs offer security and predictable returns through interest payments and some have flexible withdrawal terms. That makes them potentially appealing to those with distinct short-term goals or looking to enhance returns on an emergency fund.

While you could hold instruments such as relatively low risk bonds in a Stocks & Shares ISA, the range of instruments which can be held in them offers potential for higher returns through market growth. Of course there is also the risk of losing money, if investments perform poorly.

Are There Rule Differences Between Cash ISAs vs Stocks & Shares ISAs?

While both ISA types share the same fundamental tax advantages, there are some important differences in rules to understand. Crucially, these rules are continuously being updated meaning investors need to stay updated.

Rule Category	Cash ISA	Stocks & Shares ISA
Annual Allowance	Maximum allowance is £20,000 (2025/26 tax year) From April 2027, the maximum allowance for those under 65 years will be £12,000. The remaining £8,000 of the £20,000 annual allowance could be taken up by investments in a Stocks and Shares ISA.	Maximum allowance is £20,000 (2025/26 tax year)
Multiple ISAs	Can open multiple Cash ISAs per year	Can invest in two Stocks and Shares ISAs in the same tax year.
Transfers	Can transfer to any ISA type	Can transfer to any ISA type
Withdrawals	Depends on account type but can be highly flexible	Can typically sell and withdraw at short notice unless investment terms involve a tie-in
Flexible ISAs	Some offer flexibility to reinvest withdrawals, if in the same tax year	Cash withdrawn from an ISA which is not ‘Flexible’ cannot be reinvested within the same tax year.
Trading Restrictions	Not applicable	Restrictions include: no short selling, no derivative instruments, no crypto and no access to tax loss harvesting.

Both ISA types must comply with HMRC regulations, including the requirement to be a UK resident (or Crown employee serving overseas) and be 18 or over. The UK tax year which runs from 6th April to 5th April applies to both, meaning your annual allowance resets each April.

Can You Have Both a Cash and a Stocks & Shares ISA?

Yes, you can have both types of ISA, and many investors choose to do exactly that for a balanced approach to saving and investing.

You could pay into both a Cash ISA and a Stocks and Shares ISA in the same tax year. Your total investment must remain below the £20,000 annual limit and you will have to abide by restrictions on Cash ISA allowances being introduced in 2027.

This flexibility of using both Cash and Stocks and Shares ISAs allows you to:

• Use a Cash ISA for short-term savings goals and emergency funds
• Invest through a Stocks & Shares ISA for long-term wealth building
• Split your annual £20,000 allowance between both types as you see fit

You can also transfer funds between ISA types without affecting your annual allowance, but keep in mind that cash ISA annual allowances are due to fall in 2027.

Which ISA is Right for You?

Choosing between a Cash ISA and a Stocks & Shares ISA depends on several personal factors:

Potentially consider a Cash ISA if you:	Potentially consider a Stocks & Shares ISA if you:
Need access to your money within 1-3 years	Have an investment time horizon of 5+ years
Cannot afford to lose any of your capital	Can tolerate market volatility
Favour predictable, guaranteed returns	Want the potential for higher returns
Are saving for a specific short-term goal	Already have an emergency fund elsewhere
Prefer simplicity and peace of mind	Are comfortable making investment decisions (or using managed portfolios)

Final thoughts

Many savers adopt a balanced approach and use both types of ISAs as part of their overall financial strategy. That might involve keeping 3-6 months of expenses in a Cash ISA as an emergency fund while investing additional savings in a Stocks & Shares ISA targeting potential long-term growth.

Remember, tax rules can change, so the £20,000 limit for example, while applicable now, might be different in the future. It’s also important to review your ISA strategy regularly and adjust based on your changing circumstances and investment goals.

Visit the eToro Academy to learn about the different tax-efficient investment schemes available.

FAQs

Can I switch my Cash ISA to a Stocks & Shares ISA later?

Yes, you can transfer your Cash ISA to a Stocks & Shares ISA at any time without losing the tax benefits or affecting your annual allowance for transfers from previous years. This flexibility allows you to adjust the balance of your portfolio in line with market cycles.

What happens if my Stocks & Shares ISA loses value?

Unlike Cash ISAs, Stocks & Shares ISAs don’t protect your capital. If investments fall in value, you could get back less than you invested. However, historical data suggests diversified portfolios have recovered from short-term losses in instances where they have been held for longer periods.

Are there any charges for Cash ISAs?

Most Cash ISAs don’t charge fees, though some may have penalties for early withdrawal from fixed-term accounts. Stocks & Shares ISAs typically charge platform fees and instruments such as ETFs may charge investment management fees.

Can I transfer funds in a Cash ISA into a DIY Stocks and Shares ISA?

Yes, you can transfer some or all of the money held in a Cash ISA into a DIY Stocks and Shares ISA. Transferring money from a Cash ISA set up in a previous year won’t count towards your annual £20,000 ISA allowance.

What are the average returns on a Stocks and Shares ISA in the UK?

ISA manager Moneyfarm reports that the average return on a Stocks and Shares ISA held on their platform between 2014 and 2024 was 9.64%. Past performance is no guarantee of future returns, as confirmed by the same ISA manager reporting that in the tax year 2021-22, the average return was 6.92%.