Cash ISA vs Stocks and Shares ISA

In this guide, we’re going to help you choose between two of the most popular and common types of ISA: the Cash ISA and the Stocks and Shares ISA.

ISA stands for ‘individual savings account’ and they’re accounts part of government support to help you save tax-free.

Keep reading – you’ll learn that Cash ISAs are a good place to stash your money that you might need soon, because you don’t pay any tax on any of the interest you earn.

But we’ll also show you how you can grow your money much more through a Stocks and Shares ISA, because your cash gets invested smartly in the stock market. Don’t worry — it’s not as scary as it sounds.

Simply put, both are great options, much better than keeping money under your bed. But investing in a Stocks and Shares ISA pays off far better in the long term.

Heads up, we’ll mention an ‘ISA provider’ a lot. This is just the company that manages your ISA (sometimes called an ISA manager). They can be a bank, a building society, an online website or an app on your phone.‍

Cash ISA vs Stocks and Shares ISAs

First, we’ll explain everything you need to know about Cash ISAs. If we’ve already convinced you about Stocks and Shares ISAs, head straight to Stocks and Shares ISAs.

Cash ISAs

In some ways, a Cash ISA is pretty similar to a savings account that you’ll probably be familiar with. The big difference is that you don’t have to pay tax on any of the interest you earn on your savings. Awesome!‍

Explainer: Interest is the cost of borrowing money. When you put your money in an account, the bank pays you interest because they’re essentially “borrowing it” to use for their services (such as loans to other customers).‍

With a savings account that’s not a Cash ISA, if you’re a basic-rate taxpayer (meaning you earn less than £50,270 per year) you’ll pay tax on any interest you make over £1,000 per year. So if you make £1,150 in interest, the government would want their cut of the extra £150.

And if you earn more than £50,270 per year (meaning you’re considered a higher-rate taxpayer), you’ll pay tax on any interest you earn that’s over £500 per year. So if you made £1,150 in interest, the government would want their cut of the extra £650.

With a Cash ISA, and all ISAs, you can save up to £20,000 every year and not pay a penny in tax. Winning!

‍‍What are the different types of Cash ISAs?

You can get a few different types of Cash ISA, which are:

• Variable-rate: the interest you earn on your savings typically fluctuates in line with the Bank of England base rate (the rate the Bank of England charges other banks and lenders when they borrow money). Your provider will typically pay you less than the base rate.
  

• Fixed-rate: your ISA provider determines what the interest rate will be, and it’ll stay the same for a certain period of time.
  
  
• Instant-access or easy-access: save your cash in an ISA, and get your money back whenever you need it, unlike a fixed-rate where your money is locked away (unless you pay a hefty fee).
  
  
• Flexible: you can withdraw money (say, for an unexpected bill) and pay it back in the same tax year, without affecting your £20,000 allowance. If your ISA isn’t a flexible one, you’d pay the money back and it would come off your ISA allowance for that year. Don’t worry, we’ll explain this later.

Accessing your money within a Cash ISA

With instant-access ISAs and flexible ISAs you can withdraw your money whenever you like. But you’ll typically be getting a lower interest rate for the ability to do so. 

With a fixed-rate Cash ISA, you are lending your money to the bank for a period of time, up to 5 years, and they want to lend that money back out to other customers, so don’t want you to withdraw your money.

For that reason they’ll give you a higher interest rate, but add withdrawal fees to deter you from taking your money out before your deal ends. And the fees can be quite high!‍

‍‍Stocks and Shares ISAs

If you haven’t guessed yet, we’re big fans of Stocks and Shares ISAs. They allow you to really get your money working for you, and build up your savings over time to amounts you might not quite believe until you check your account. The amount you can make is far greater than a Cash ISA.

You might have heard that stocks and shares are ‘risky’, or you’ll lose money investing. Or you might even find them scary and too confusing for you. But that’s why we’re here – explaining the real facts and benefits, and how easy it is for you to get started and start growing your savings.

What is a Stocks and Shares ISA, and what are the benefits? 

A Stocks and Shares ISA acts almost exactly the same as a Cash ISA, or even a savings account, it just has a fancy name. You’ll open an account with an ISA provider (that’s a company who manages the ISA for you), put money in it, ideally regularly, and they’ll handle everything for you. You can just sit back, relax and watch your savings grow.

Best of all – everything you earn within your ISA in completely tax free! That’s huge.

Normally if you buy and sell stocks and shares outside of an ISA, you’ll be paying Capital Gains Tax on the increase in value of your money. Capital is a fancy word for money, and if you ‘gain’ more, the Government wants their cut. 

If your ‘gains’ are below £3,000, which is your Capital Gains Tax free allowance, you won’t pay any tax anyway, but if your gains are above that, expect to pay 18% if you are a basic rate tax-payer (earn less than £50,270 per year) and 24% if you are a higher rate tax payer (earn more than £50,270 per year). Plus you have to deal with the admin of actually working it out and paying it.

This is where the ISA comes in. All the increase of your money (gains) within a Stocks and Shares ISA, is completely free of Capital Gains Tax, forever. So year after year as your money grows and grows, you’ll never have to worry about paying tax at all. Result!

Better still, the money you aren’t paying in tax you get to keep invested to make you even more money, year after year, with your account growing and growing. This is called compound interest and it’s a real game changer – it’s how you can begin to make large sums of money from very small amounts.

How does a Stocks and Shares ISA work?

So, no tax sounds great, but how does it all work, what even is a stock and a share?

Well, your ISA provider will work with an investment fund(s), and these experts will decide how and where your money is invested. These normally consist of:

• Stocks and shares: which are ownership stakes of individual companies around the world. The value of these shares grow when a company becomes more valuable itself. Shares can be bought and sold any time on a stock market (called traded).
  

• Exchange-traded funds (ETFs): these are a combination of different company shares, making up a mix of investments that might represent different things, such as the top 100 companies in the UK, or a group of companies within the energy industry. ETFs allow people to buy shares in the fund rather than each individual company. They are traded on a stock market, just like individual company shares, so can be bought and sold easily and quickly.
  

• Bonds: these are letting companies and/or governments borrow your money. Just like a loan from a bank, except it’s a company borrowing your money. You earn money when that loan is repaid with interest.
  

• Property: which for ISA investments is often investing in commercial property. 

Don’t worry if you don’t understand the above, the experts will handle everything for you.

Your ISA provider will often give you a few options to choose from to make it simple and that’s all you need to do. For example, only investing your money in socially responsible companies (i.e. no tobacco firms, or bad energy companies) – we’re big promoters ourselves of your investments having a good impact on the world, you can make the world a better place and still make money. Go green! The future will thank you!

And they’ll also ask which ‘risk’ level you would like, but often suggest the best one for you – which is often dictated by your age or if you’re planning to buy something soon. For instance if you’re nearing retirement, you’d prefer the amount in your account to be more stable, all ready for your actual retirement.

If you’re young and not planning to take the money out for years and years, you’d pick a higher risk option, which means some of the investments made could be allocated to investments that have a high chance of growing a lot, but also a small chance they might not work out as expected. For instance, your money might get invested in the electric vehicle industry – where it’s highly likely to succeed and grow a lot, but not certain.

Whichever risk level you choose, you’ll never lose all of your money within your ISA. Each investment is only a small proportion of the total investments within the investment fund, and the vast majority are safe and stable investments. Long term growth is the goal of every investment fund – and they are very good at managing risk and investments to do just that.‍

The types of Stocks and Shares ISAs

Stocks & Shares ISAs come in 2 different types, you’ve got expert-managed Stocks & Shares ISAs and then you’ve got self-managed Stocks & Shares ISAs.

Expert-managed Stocks & Shares ISAs

With expert-managed Stocks & Shares ISAs, there’s not much to do, experts handle everything for you – all you need to do is add money! After that just sit back, relax and watch your money grow over time. 

These are perfect for beginners new to investing, all the way to experienced investors who want an easy life. You can’t go wrong.

Self-managed Stocks & Shares ISAs

These ISAs give you much more control over your investments, you’re the one who decides where you money goes – which shares to buy, which funds to buy, and when to sell and move into new investments.

It can be a bit daunting, but once you know the basics and are confident with your investments, you’re able to have much greater flexibility and a lot more options to invest your money. But, it’s not recommended for those new to investing, stick with an expert-managed ISA to start with if that’s you.

How much does a Stocks and Shares ISA cost?

It’s worth remembering that you’re often getting experts to manage your investments and help your money grow. And more importantly, protect it, with responsible investment strategies.

It’s worth it, because it’s in their best interest to make sure you do well. Usually it means they get paid more, too – so it’s a mutual win-win.

ISA providers normally charge around 0.25% – 2% for most expert-managed providers, and the lower end for self-managed providers (but there can be fees for making investments).‍

Withdrawing money from a Stocks and Shares ISA

First – we don’t think you should withdraw your money unless it’s absolutely necessary. As far as possible, it’s better to save and grow your wealth. 

But if you have to withdraw your money from your Stocks and Shares ISA, your ISA provider will sell your investments. This will normally take from a day to a week.

If you haven’t been investing for long, you might get back more or you might get back less than you put in. This is the main thing to watch out for when withdrawing from a Stocks and Shares ISA – different from a Cash ISA, where you know the interest rate you’ve been getting.

It’s worth repeating: Stocks and Shares ISAs are for the medium-to-long-term. ‍

Are Stocks and Shares ISAs safe?

Stocks and Shares ISAs have a reputation for riskiness that they don’t deserve – the only people who tend to think they are risky are the people who don’t use them!

Yes, your money can go up and down. But if you keep it invested for the long-term, you will ride out the bumps in the stock market and come out with an impressive amount at the end.

Investing in a Stocks and Shares ISA is actually less risky than letting your money sit in a low-interest savings account or Cash ISA, because you’re ‘making your money work for you’. As we described shortly, you won’t get hit so badly by rising inflation devaluing your savings either.

Importantly, Stocks and Shares ISAs, as well as Cash ISAs, are protected by something called the Financial Services Compensation Scheme (FSCS). In the unlikely event your ISA provider happens to go out of business, you’re covered to the sum of £85,000 per ISA provider. And often your money is actually stored with a large bank or financial institution, not the ISA provider itself, to give you even more protection.

What about inflation?

Inflation – which is a fancy word for the cost of living increasing – so your food shopping, energy bills, petrol, basically everything you’ll buy often, increasing in price. 

For example, in 2002, a pint of milk cost 31p, in 2022 it was 55p – that’s nearly double the price, for the same milk carton.

Inflation is measured as a percentage, and it represents a rough approximation of the total cost of living increasing over a year.

Now let’s apply that to a Cash ISA and a Stocks and Shares ISA...

The average return from investing is typically higher than the rate of inflation, and so you'll be staying ahead of inflation. You won’t get that every year, there'll be ups and downs, but on average over time you’ll be making money.

But with a Cash ISA, it's typically lower, and can be lower than inflation, which means your money is actually going down in value by the difference.

We know, we know, it’s a confusing topic. But all you need to know is, inflation is bad for your savings, and you want your savings, and wages to be above, or at the very least keep in line with it, or you’ll effectively be getting poorer, even though you are saving hard!

So, in terms of inflation, one of the best ways to beat it over time is with a Stocks and Shares ISA, as on average your money growing each year is far higher than a Cash ISA. But a Cash ISA is still better than keeping your savings under your bed or in your regular bank account, as you then wouldn’t be getting any interest on your savings at all.

You can see why we love Stocks and Shares ISAs so much. And, that’s not even factoring in the tax-free savings! That’s an extra bonus.‍

The Lowdown: Cash ISAs vs Stocks and Shares ISAs

Ok, so it’s pretty clear that Stocks and Shares ISAs offer much better returns than Cash ISAs. But Cash ISAs are still a great place to keep savings that you might need in the near future, while still gaining interest on them, all tax free.

For the medium-to-long term, a Stocks and Shares ISA is the way to go.

Let’s compare Cash ISAs and Stocks and Shares ISAs in a head-to-head battle. 

First, what do they have in common?

• You don’t pay any tax
• They’re easy to open, and there’s lots of choice out there
• Your money is protected by the Financial Services Compensation Scheme (FSCS)
• You can only open one of each ISA type every year
  

What are the main advantages of a Cash ISA?

• Guaranteed interest rate (for fixed-rate ISAs), which you know in advance
• They’re better for short-term saving than a Stocks and Shares ISA (although we always recommend saving for the long-term)
  

And what are the main advantages of a Stocks and Shares ISA?

• You’ll typically see a lot more growth in your money over time (this is the big one!)
• It’s a really accessible and easy way to start your investment journey
• You can have a lot of influence over how your money is invested
• You don’t pay any Capital Gains Tax, which you would with non-ISA investments

Can I have a Cash ISA and a Stocks and Shares ISA? 

Why choose one when you can have everything? That’s another great thing about ISAs – you’re allowed to open both! (Actually there’s also a Lifetime ISA you can open too, more on that below).

You’ve got a yearly ISA allowance of £20,000 per year, to do with as you like, so you could put £12,000 in a Stocks and Shares ISA, and the remaining £8,000 in a Cash ISA, for example. That’s if you’re a great saver and able to save £20,000 of course!‍

Nuts About Money tip: have some savings available for the short-term, while investing for the long-term with the rest of your money.

So, put simply: yes, you can do a bit of saving and a bit of investing – all through ISAs.

Back to Lifetime ISAs. If you’re saving for a house, you might also want to put your savings into a Lifetime ISA, and get a 25% bonus from the Government each year. You get a £4,000 allowance for these, which is part of your total £20,000 allowance.‍

Alright, what’s next?

There’s no time like the present – get started saving and investing!

A Stocks and Shares ISA can help you combat rising inflation and provide a much better place to grow your money over time than a Cash ISA.

For medium-to-long term growth, Stocks and Shares ISAs are the way forward, and all managed by experts, protecting your money and growing it safely. There’s nothing to fear.

There are lots of great ISA providers to choose from, both with expert-managed and self-managed ISAs, so however hands-on or hands-off you want to be, there’s a right ISA provider for you.

Cash ISAs are also a good option too if you just want to put some cash away in a savings account for emergencies, or if you want to save some money for the short-term.

Whichever type of ISA you choose (and remember, you can have both to cover your short-term saving and long-term investing!), everything you earn from your ISA is completely tax-free.

If you want to learn even more about investing, we've got a great guide to investing for beginners, and check out the best Stocks and Share ISAs.