Cash ISA versus stocks and shares ISA: Which one is right for you?

Depending on whether you’re putting money away for a drizzly day or saving for a boat, you could make your savings go further. It’s important to know what sort of ISA works for you. The potential for a higher return but higher risk paddle in the stock markets or keeping your savings sturdy in a cash ISA.

What's a cash ISA?

A cash ISA, or Individual Savings Account, is a tax-efficient savings account – you can save up to a certain amount each year without paying any UK income tax or capital gains tax on the interest earned. There are various types of cash ISAs, including instant access, notice, and fixed-rate cash ISAs.

Benefits of a cash ISA

  1. Tax-efficient: You won't pay any UK income tax or capital gains tax on the interest earned in a cash ISA, so you get to keep more of your savings.
  2. Easy access: Many cash ISAs offer instant access to your money so you can get hold of your money whenever you need to, like paying for a holiday or unexpected bills, as long as it’s not locked in for a certain length of time.
  3. Low risk: Cash ISAs are thought of as low risk, making them popular for those who want to protect their savings.

Cash ISAs can be a great way to save, but bear in mind that inflation can reduce the buying power of your money, particularly if the interest rate is less than the rate of inflation.

What’s a stocks and shares ISA?

It’s a tax-efficient account that allows you to invest in investment funds, stocks, shares, and other types of investments, like investments trusts. These are often preferred by those who want to invest for the long term and potentially earn higher returns than they would with a cash ISA.

Benefits of a stocks and shares ISA

  1. Tax-efficient growth: Any returns earned on your investments in a stocks and shares ISA are free from UK income tax and capital gains tax so you get to keep more of your gains.
  2. Diversification: You can invest in a wide range of stocks, shares, and other assets, spreading your risk and potentially earning higher returns.
  3. Long-term growth: holding onto them for the long term means you have the potential to earn higher returns over time by watching the stock markets for when they’re riding those high waves or you’re able to hold steady during any market turbulence.

With a Stocks and Shares ISA it’s good to bear in mind that the value of your investments can fall as well as rise, and you could get back less than you put in.

Can I have both a cash ISA and a stocks and shares ISA?

Yes, you can have both a cash ISA and a stocks and shares ISA, and many people do. It's worth thinking about having both as it allows you to take advantage of the different benefits they offer. However, there are some important things to keep in mind.

Firstly, it's important to understand the annual ISA allowance. The ISA allowance for the 2024/2025 tax year is £20,000, which means you can invest up to £20,000 across all your ISAs in this tax year. You can choose to invest the full amount in a cash ISA, stocks and shares ISA, or a combination of both. It's also worth noting that there are other types of ISAs available, such as the Lifetime ISA and the Innovative Finance ISA. 

Your exact tax benefits will depend on your circumstances and may change in the future.

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