Innovative Finance ISA vs cash ISA

An Innovative Finance ISA and a cash ISA are both ISAs, so both are tax free, and both count towards the same £20,000 annual allowance. What separates them is what sits inside. A cash ISA works like a tax-free savings account, holding deposits that earn interest¹. An Innovative Finance ISA holds peer-to-peer loans and similar investments, so your money is lent to individuals or businesses and you earn tax-free interest on those loans¹.

That difference decides everything else. Cash in a cash ISA with a bank or building society is covered by the Financial Services Compensation Scheme. Innovative Finance ISA money is not protected by the FSCS, and the FCA categorises these products as high risk investments³. You can lose money, and there is no compensation scheme standing behind the loans.

The rules are also about to change. From 6 April 2027, the cash ISA subscription limit falls to £12,000 for investors under 65, within the overall £20,000 allowance, and transfers from a stocks and shares ISA or an Innovative Finance ISA into a cash ISA are prohibited for account holders below the age of 65⁴. Savers aged 65 and over keep a £20,000 cash ISA limit and can still transfer in⁶.

What an Innovative Finance ISA holds compared with a cash ISA

A cash ISA is the simpler of the two. It works like a tax-free savings account, and the money you pay in stays as cash, earning interest¹. Easy access versions let you take money out at any time, usually at a variable rate that can change⁸. Fixed rate versions tie your money up for a set term in exchange for a rate that is fixed for that period.

An Innovative Finance ISA is an investment account. It is designed to let you invest in more long-term, less-liquid investments, including crowdfunding debentures, alternative finance arrangements and peer-to-peer lending⁹. In plain terms, it is essentially peer-to-peer lending: you earn tax-free interest by lending money to individuals or businesses¹⁰. The investments are loans, not deposits.

The rules allow certain investments that would otherwise qualify for a stocks and shares ISA, but for their limited liquidity, to be held in an Innovative Finance ISA instead¹¹. An Innovative Finance ISA is made up of a single innovative finance component only, so it cannot be a mix of components in the way some other wrappers can¹². It can hold cash that has not yet been invested, but that is being tightened: from April 2027, cash may no longer qualify as a permitted investment within Innovative Finance ISAs⁹.

The practical difference is what you own. In a cash ISA you own a deposit with a bank or building society. In an Innovative Finance ISA you own a claim on borrowers, and whether you get your money back depends on whether they repay.

Innovative Finance ISA or cash ISA: how the risk differs

This is the section that matters most. Cash ISA deposits sit with a bank or building society and are covered by the Financial Services Compensation Scheme. Innovative Finance ISA money is not protected by the FSCS, and the products are not regulated in the same way³. The FCA categorises Innovative Finance ISAs as high risk investment products³.

The risk is not theoretical. Your money is lent out, so if borrowers default, or the platform running the loans fails, you may not get all of it back. Tax-free treatment does not change that: an ISA wrapper removes tax, not investment risk. The same is true of a stocks and shares ISA, which is why both sit on the investment side of the line rather than the savings side.

There is a second layer of risk that is easy to miss. Because the loans are long term and less liquid, getting your money out can depend on borrowers repaying or on other investors buying your position. A cash ISA does not have that problem: easy access versions let you withdraw at any time, and fixed rate versions have a defined term.

One £20,000 allowance shared across both

Both accounts draw on the same annual allowance. The £20,000 limit applies across cash ISAs, stocks and shares ISAs and Innovative Finance ISAs, and you can split it across different types as you choose⁴. You could put part in a cash ISA and part in an Innovative Finance ISA, or all of it in either one.

Since 6 April 2024, you can also subscribe to more than one ISA of the same type in the same tax year, so the old restriction on opening a second cash ISA with a different provider has gone. The only overall rule is that your total payments across all your ISAs stay within £20,000⁴.

The allowance itself is staying at £20,000. The Treasury confirmed the annual ISA allowance will be kept at £20,000, and the limits for Innovative Finance ISAs, LISAs and Stocks and Shares ISAs remain the same from April 2027¹³. What changes is how much of it can go into cash.

Getting your money out: flexible withdrawals depend on the provider

Cash ISAs, stocks and shares ISAs and Innovative Finance ISAs can all be flexible, but it is up to individual providers whether they offer this¹⁴. A flexible ISA lets you withdraw money and pay it back in again within the same tax year without it affecting your ISA allowance¹⁵. The replacement money must go back into the same ISA account, though it can go into a flexible stocks and shares or flexible Innovative Finance ISA¹⁶.

For cash ISAs, flexibility is common but not universal. Easy access cash ISAs let you withdraw at any time, usually at a variable rate⁸. Some providers describe their accounts as flexible, meaning money withdrawn and replaced in the same tax year does not count again towards your allowance, provided the account stays open¹⁷. Others accept withdrawals but are not flexible, so replacing the money uses fresh allowance.

For Innovative Finance ISAs, access is a different question entirely. Even where a provider offers flexible withdrawals, the underlying loans may not be repayable on demand. Your ability to get money out depends on the terms of the loans and whether the platform can match your position with another investor. That is a feature of the product, not a provider failing.

Transferring between an Innovative Finance ISA and a cash ISA

You can transfer money that is already inside a cash ISA or a stocks and shares ISA into an Innovative Finance ISA offered by a peer-to-peer provider⁹. Transfers take place in cash, so if you hold a stocks and shares ISA, your investments would be sold and the cash used to invest⁹. To do it, you complete a transfer form with the Innovative Finance ISA provider you want to switch to⁹.

Going the other way is where the rules bite. From 6 April 2027, transfers from a stocks and shares ISA or an Innovative Finance ISA into a cash ISA are prohibited where the account holder is below the age of 65⁵. The restriction is disapplied for those aged 65 and over from the start of the tax year in which they turn 65⁶. The government's stated reason is the need for those approaching retirement to restructure and reduce risk in their investments⁵.

Some providers already refuse these transfers. One building society states plainly that it will not accept the transfer of an Innovative Finance ISA into its cash ISA, and another accepts only cash ISA to cash ISA transfers, with no transfers in from stocks and shares, Innovative Finance or Lifetime ISAs²⁰.

Transfers from a cash ISA into a non-cash ISA remain possible, so moving money the other way is unaffected. If you are considering a transfer, check three things first: whether your new provider accepts ISA transfers, whether your current provider charges for them, and whether either account is flexible²⁰.

Upcoming ISA rule changes: cash ISA cap for under-65s and the end of transfers into cash ISAs

Two changes take effect on 6 April 2027, and both affect anyone choosing between these accounts.

The first is the cash ISA cap. The annual ISA cash limit will be set at £12,000, within the overall annual ISA limit of £20,000⁴. Regulation 6 introduces a £12,000 limit on subscriptions to cash ISA accounts for individuals under the age of 65²¹. Savers aged 65 and over keep a £20,000 cash ISA limit, with entitlement applying from the start of the tax year in which they turn 65⁶. For an under-65 saver wanting to use the full £20,000, the remaining £8,000 would need to go into a stocks and shares or Innovative Finance ISA²².

The second is the transfer restriction. Transfers from non-cash ISAs into cash ISAs will not be permitted from 6 April 2027⁶. The anti-circumvention rules are designed to prevent transfers from non-cash ISAs into cash ISAs for the under-65s²³. A 22% charge applies to interest paid on cash holdings held in stocks and shares and Innovative Finance ISAs²³. For those aged 65 and over, the charge and the prohibition on 100% cash-like investments remain in place⁶.

The changes come into force on 6 April 2027 under the Individual Savings Account (Amendment) Regulations 2026²⁴. The limits for Innovative Finance ISAs, LISAs and Stocks and Shares ISAs remain the same¹³.

Why the Innovative Finance ISA exists

The Innovative Finance ISA was introduced to widen what can be held tax free. It became available on 6 April 2016, when interest and gains from peer-to-peer loans qualified for tax advantages where those loans are made through an ISA². The government consulted on including peer-to-peer loans in ISAs and decided to introduce a new type of ISA for them, alongside cash ISAs and stocks and shares ISAs²⁵.

The rules have been extended since. Certain investments subject to a notice period, which cannot be held in a stocks and shares account, may be held in an innovative finance account²⁶. From April 2024, those with Innovative Finance ISAs were able to invest in a broader range of investments²⁷. Long-term asset funds were added as qualifying investments for the innovative finance component in 2025, and from 6 April 2026 UK cryptoasset exchange traded notes may be held under an innovative finance account but not a stocks and shares account²⁸.

The direction of travel is towards a wrapper that holds genuinely long-term, illiquid investments, with cash squeezed out. That is worth knowing before you choose it as a home for money you might need at short notice.

Where to get help

If something goes wrong with an ISA, the Financial Ombudsman Service can look at complaints about ISAs, including Innovative Finance ISAs¹. The ombudsman is free to use and independent. Complain to the provider first, then take the complaint to the ombudsman if it is not resolved.

For free, impartial guidance on ISAs and savings more generally, MoneyHelper is the government-backed service. For debt problems, StepChange and other debt advice charities offer free help.

If you are weighing up the investment side rather than the cash side, Innovative Finance ISAs and stocks and shares ISAs sit on the same side of the risk line, and how your ISA is protected explains what the FSCS does and does not cover. The changes to the cash ISA limit are set out in full, and how to transfer an ISA covers the process step by step.