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Cash ISA vs Stocks and Shares ISA: which is best?

Learn more about saving and investing in ISAs.

What is the difference between a Cash ISA and a Stocks and Shares ISA?

Cash ISAs and Stocks and Shares ISAs are the two most common types of ISA, or Individual Saving Account. The key tax benefit of any type of ISA is that your gains are free from Income Tax, Capital Gains Tax and tax on UK dividends. 

The main difference between the two types of account is how you can earn tax-free profit on your money. In Cash ISAs, you only receive interest on your cash savings. In Stocks and Shares ISAs, your money is invested and grows, or falls, depending on well your investments perform.


What is a Cash ISA?

A Cash ISA is a savings account in which you earn tax-free interest. 

You know what return you will receive on your money, as Cash ISAs have a set interest rate (although your provider can change this rate). 

As your money is not invested, there is no risk that you will lose money. However, if the interest rate is lower than inflation, the amount your money can buy will gradually reduce over time.


What is a Stocks and Shares ISA?

A Stocks and Shares ISA is a tax-efficient investment account. Rather than receiving a fixed rate of interest, you invest your money in a range of investment options such as shares, funds, investment trusts, ETFs and bonds. Your returns depend on how your investments perform over time. 

Any profit you make on your investments is tax-free and UK dividend income is also tax-free. 


Why choose a Cash ISA?

Cash ISAs provide security as you cannot get back less than money than you put in. They are ideal if you want to save money without taking any risks.

They are also typically more suitable than Stocks and Shares ISAs for short-term saving. For example, if you are saving for a new car or for emergency funds that you cannot afford to lose. 

Like in a Stocks and Shares ISA, you can withdraw money from most Cash ISAs whenever you need to.


Why choose a Stocks and Shares ISA?

A Stocks and Shares ISA allows you to invest your money tax-efficiently and keep any profit you make tax-free. 

Stocks and Shares ISAs could potentially beat inflation and provide real returns. On the other hand, Cash ISAs are likely to provide returns which are lower than inflation. 

As with any form of investing, there is the risk of losing money. This makes Stocks and Shares ISAs more suitable for the long term as you are more likely to ride out the ups and downs of the stock market over longer time periods. 


Cash ISA vs Stocks and Shares ISA returns: long v short-term

Cash ISAs tend to be more suitable for short-term saving while Stocks and Shares are more suited to long-term investment. Therefore, it is a good idea to think about what you are saving for first if you are choosing between them. 

If you think you will need to withdraw money in the next few years, then the security of a Cash ISA might be more suitable. Investing carries more risk in the short-term, as a sudden dip in the market could leave you with less money and unable to afford your financial goals. 

Stocks and Shares ISAs are more suitable for long-term investing if you are looking to grow your money and get potentially greater returns. But you should be prepared for the risk of losing money.


Can I have a Cash ISA and a Stocks and Shares ISA at the same time? 

You can have a Cash ISA and a Stocks and Shares ISA, so you don’t have to choose between them. 

Your £20,000 annual allowance is spread across each type of ISA you have. Therefore, you can split your allowance however you choose to. 

For example, you could invest £10,000 per year in each. Alternatively, you could prioritise one type of ISA but still save in a Cash ISA and invest in a Stocks and Shares ISA.


Can I open a Cash ISA and a Stocks and Shares ISA in the same year?

You can open one of each type of ISA in the same tax year. You could open a Cash ISA, Stocks and Shares ISA, Lifetime ISA and an Innovative Finance ISA in the same year. 

However, you can’t open two of the same type of ISA in the same tax year. 


Can I transfer a Cash ISA into a Stocks and Shares ISA?

You can transfer a Cash ISA into a Stocks and Shares ISA

Transfers between ISAs do not count towards your ISA allowance. This means you could transfer a Cash ISA worth over £20,000 into your Stocks and Shares ISA. 


Can I transfer a Stocks and Shares ISA into a Cash ISA?

You can transfer a Stocks and Shares ISA into a Cash ISA. Before you transfer, you will need to sell your investments to transfer in cash. 


Can I hold cash in a Stocks and Shares ISA? 

You can hold cash in a Stocks and Shares ISA. 

However, most Stocks and Shares ISAs do not pay interest on your cash balance. While you may wish to keep a small cash balance in your Stocks and Shares ISA to pay for fees and charges, you will probably earn more interest on cash savings in a Cash ISA. 

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