Every UK adult can put up to £20,000 into an ISA during the current 2026/27 tax year. However, if you are under 65, this is the final year you can put your full £20,000 into a Cash ISA. New rules introduced in the November 2025 Budget mean that from April 2027, the annual Cash ISA contribution limit will be slashed to £12,000 for under-65s, with the remaining £8,000 available for a Stocks and Shares ISA (or another non-cash ISA type) — or simply left unused.

In this article we're going to explain the differences between these two ISA types. Plus, we'll take a look at the pros and cons of each.

What is an ISA?

An ISA is a tax-free account.

Anything you save or invest in an ISA stays tax-free - not just for the current tax year, but for subsequent tax years too.

Money you withdraw from an ISA loses its tax-free wrapper (but the rest of your ISA balance stays protected). (Flexible ISAs are the exception — see below.)

What is the annual ISA allowance?

If you've savings worth more than £20,000 you won't be able to stick it all into an ISA in one go. That's because you're limited as to how much you can save in an ISA during any given tax year by the annual allowance.

The overall annual ISA allowance for the 2026/27 tax year remains at £20,000. However, the November 2025 Budget has set a firm cap for under-65s starting in April 2027: you will only be able to contribute a maximum of £12,000 into a Cash ISA each year.

While you can currently still use the full £20,000 for cash in the 2026/27 tax year, the Government is already encouraging a shift toward investing; if you put £12,000 into a Cash ISA, the remaining £8,000 of your allowance can go into a Stocks and Shares ISA (or another non-cash ISA type) — though you're not obliged to use it, and any unused allowance simply can't be carried forward.

Any unused ISA allowance is lost and cannot be carried over to a new tax year.

A word on flexible ISAs... Most ISA aren't flexible. If you take money out of a non-flexible ISA, you won't be able to replace anything you withdraw within the same tax year. However, specialist 'flexible' ISAS do allow you to replace anything you withdraw without it impacting your annual ISA allowance. That's as long as you replace the money within the same tax year.

The future of the ISA allowance

The Government can change ISA rules and allowances through future legislation, as it did with the cash ISA reforms announced in the November 2025 Budget.

What are the differences between a Cash ISA and a Stocks & Shares ISA?

Cash ISAs and Stocks & Shares ISAs work very differently. To discover how, here's a closer look at these contrasting ISA types...

Cash ISAs

A Cash ISA is simply a tax-free savings account. Anything you save into a cash ISA earns interest.

Like with normal savings accounts, there are a number of different types of Cash ISAs. There are easy-access cash ISAs where you can add and withdraw funds as often as you like. Interest rates are variable, so they can change at any time.

To earn a higher interest rate you can instead opt for a fixed cash ISA. This is where your interest rate is 'fixed' for a set period. Usually the longer the term, the higher the interest rate. While all fixed cash ISAs allow you to access your cash early, a hefty interest penalty often applies to the sum of money you take out before your fixed term has ended.

Cash ISA rates have followed the same pattern as the wider savings market. Bank of England data on quoted 2-year fixed-rate cash ISAs (including bonuses) shows average rates peaking at 5.39% in September 2023, falling steadily to a low of 3.67% in February 2026, then climbing back to 4.41% by August 2026 — even though the Bank of England's own base rate has held steady at 3.75% throughout 2026. Rates vary by term (easy-access vs. fixed) and by provider, so it's worth comparing current live rates before committing to an account.

Source: Bank of England, Quoted household interest rates (series IUMZID2), monthly data to August 2026.

Don't forget about the Personal Savings Allowance... Savers can also earn interest tax-free outside an ISA, up to the Personal Savings Allowance limit. While these accounts aren't entirely tax-free, unless you're an additional rate taxpayer, you'll still be able to earn £500-£1,000 tax-free interest every year thanks to the Personal Savings Allowance.

Stocks & Shares ISAs

A Stocks & Shares ISA is a tax-free investing account.

Investing carries risk: the value of your investments can fall as well as rise, and you may get back less than you put in. Cash savings don't carry that same risk to your capital (balances up to £120,000 per person, per institution are protected under the FSCS) though inflation can still erode the real value of cash over time.

Over long time periods, stock market investments have historically outperformed cash savings, though this isn't guaranteed and losses are possible.

Of course, it's possible to have both a Cash ISA and a Stocks & Shares ISA. However if you're planning on contributing to both in the same tax year, do be mindful of the annual ISA limit. Remember, the limit applies to all types of ISA.

Are you interested in opening a stocks & shares ISA? Both Hargreaves Lansdown and AJ Bell offer tax-free investing accounts.

Cash ISAs vs Stocks & Shares ISAs: Which wins?

Cash ISAs and Stocks & Shares ISAs differ in a few key ways.

A fixed cash ISA locks in a guaranteed interest rate for a set term, with an early-withdrawal penalty; an easy-access cash ISA offers a variable rate with no restriction on withdrawals.

A Stocks & Shares ISA carries investment risk (the value of investments can go down as well as up, and you may get back less than you invest) but has historically offered the potential for higher returns over the long term than cash accounts. This is not financial advice; if you are unsure which is right for you, consider seeking independent financial advice. Whether an ISA is appropriate depends on the reader’s own objectives, risk tolerance and circumstances.

2026 market update: With UK inflation at 2.9% in July 2026, many top-tier Cash ISAs currently offer 'real' returns — interest rates above inflation — a welcome change after the double-digit inflation of 2022–2023 eroded cash returns for savers. However, for those with a long-term horizon (5+ years), Stocks & Shares ISAs remain a popular tool for wealth building. But remember you can lose money with a stocks and shares ISA, and historical returns are no guarantee of future performance.

Investing is not black and white. Knowing what to invest in (stocks, bonds, commodities?) and how long to invest for is something you'll need to do your own homework on.

Disclaimer: ISA Tax treatment depends on your individual circumstances and may be subject to change in the future. This article does not constitute any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.