Cash ISA vs stocks and shares ISA: which should you choose in 2025

London — The government is weighing ways to encourage savers to invest rather than keep money entirely in cash, signaling a shift in how people use ISAs. Chancellor Rachel Reeves has floated plans to push cash savers toward investments and is reportedly weighing changes that could curb the amount held in cash ISAs as part of broader reforms aimed at boosting longer-term returns for households.

An ISA, or individual savings account, is a pot that lets money grow free of tax that would otherwise be due on interest or investment gains. The annual ISA allowance is £20,000, and savers can spread that allowance across cash ISAs and stocks and shares ISAs as they wish. It’s also possible to transfer existing ISAs between providers without using up the allowance, and there is a separate lifetime ISA with its own £4,000 yearly limit that counts toward the overall allowance. If you withdraw from an ISA and then redeposit, the impact on your allowance depends on whether the account is flexible. The options available include holding both a cash ISA and a stocks and shares ISA in the same tax year, which can be useful for matching short‑term needs with longer‑term growth.

Cash ISAs offer a straightforward savings path. You deposit cash, and the account pays interest free of income tax. There is very little risk of getting back less than you put in, but the real value of your money can be eroded by inflation if the rate is lower than the rise in prices. You can choose a fixed-rate cash ISA, where the interest rate stays the same for the term, or an easy-access ISA, where rates can change and withdrawals are usually penalty-free, though the latter often pays lower rates on average.

Stocks and shares ISAs work differently. They involve investing to seek returns from investment growth or income, rather than simply earning interest. Investors can benefit from capital gains and dividends, and the tax protections apply to these gains within the ISA wrapper. Money in a stocks and shares ISA can be accessed at any time, but many experts suggest keeping money invested for at least five years to smooth out market fluctuations and improve the odds of a positive outcome over the long term.

The key reason to choose stocks and shares is the potential to beat inflation over time. While investing carries the risk of getting back less than you invested, the long-run probability of higher returns generally exceeds that of cash accounts, especially when interest rates lag inflation. When picking a stocks and shares ISA, savers should consider the investment platform they use and the fees charged for holding investments and for trading. Some providers offer ready-made portfolios or managed services, which can be more expensive, while others allow self-directed investing with a broader range of funds, shares, bonds and exchange-traded funds. Costs vary, and it’s important to factor in admin charges, dealing fees and ongoing platform costs.

You can have both types of ISA in the same tax year, which lets you tailor savings for different goals. For shorter-term aims such as a holiday or home improvements, a cash ISA provides liquidity and minimal risk. For longer-term goals—such as building a retirement fund or paying for a child’s education—a stocks and shares ISA can be appropriate, accepting that growth comes with volatility in the value of the investments. Some savers also use a mix of cash for emergency funds and stocks for growth, while pensions and other retirement accounts are used to complement ISAs.

Choosing a platform for a stocks and shares ISA is a key decision. The market features a wide range of providers with different fee structures, tools, and investment options. Some platforms charge a regular admin or platform fee, plus dealing costs for buying and selling stocks or funds, while others offer flat-rate or tiered pricing. The choice between a platform that provides a hands-on, do-it-yourself experience and one that offers advisor-guided or fund-managed options will depend on your level of investing experience, the types of investments you want, and how much you are prepared to pay for service.

In practice, experts emphasize the importance of a clear time horizon. Stocks and shares ISAs are generally best suited to longer timeframes—roughly five years or more—because this helps smooth out market movements. Inflation remains a critical consideration: cash may look safer, but its purchasing power can decline over time if interest earned fails to keep pace with price rises. Conversely, a well-chosen stocks and shares ISA can offer growth that outpaces inflation, though it carries the risk of short-term losses.

As with any investment decision, it’s prudent to inspect your options, compare platforms, and consider how fees affect net returns over the long term. This is Money’s ongoing coverage notes that investors should examine the range of options, including funds run by managers and self-directed investments, and weigh the trade-offs between potential returns and costs. The resulting choice will depend on individual goals, risk tolerance, and time horizon.

For those who want a broader picture of how to structure long-term savings, financial guidance often points toward balancing ISAs with pension savings and other retirement vehicles. While pensions have distinct rules and benefits, ISAs remain a flexible, tax-efficient way to save or invest outside a workplace pension framework. In this context, combining a cash ISA for short-term needs with a stocks and shares ISA for growth could form a practical core for many households, particularly when aligned with broader retirement planning.

Ultimately, the choice between cash and stocks and shares ISAs—and whether to hold both—depends on individual circumstances and goals. As Reeves’ government proposals unfold, savers may see greater emphasis on investment as a route to preserving and growing purchasing power over the long term, while still maintaining flexible cash options for immediate needs. The practical takeaway remains the same: understand how each ISA works, monitor inflation and fees, and align your accounts with your time horizon and risk tolerance.