The innovative finance ISA explained

If you’re looking to diversify your savings portfolio, you might want to consider alternative investments, such as the innovative finance ISA. First introduced in 2016, the innovative finance ISA, or Ifisa, allows you to earn tax-free interest on peer-to-peer lending investments.

In this article, we explain how innovative finance ISAs work and consider the risks and benefits associated with this type of account. We also include tips to help you choose an Ifisa, and outline some of the other savings options that are available.

An innovative finance ISA (Ifisa) is an account that includes peer-to-peer loans, or investments you make in a business. This type of account pairs up investors with borrowers who do not want, or cannot get, a traditional bank loan. Borrowers are typically small businesses, but they could be individuals or property developers. Ifisas typically offer higher interest rates than those available on cash ISAs or other types of savings accounts. However, investing in an Ifisa comes with significant risks and a return is not guaranteed.

You can invest up to the annual ISA allowance in an Ifisa and the interest you earn will be tax-free. The annual ISA limit is set at £20,000 for 2024/25. It’s possible to lend to borrowers outside of the ISA tax wrapper, but any returns you make could be taxed (unless the interest is below your personal savings allowance).

Anyone aged 18 or over who is a UK taxpayer can open an Ifisa through an FCA regulated peer-to-peer lender. Once you’ve picked a provider, you’ll need to invest a set amount of money, which is then loaned to your chosen borrowers. The interest rate you receive will depend on the length of the loan (or term) and the level of risk involved.

Target rates of between 4% and 8% are quite common, with riskier investments typically offering the highest rates. However, your target interest rate is not guaranteed and there is a chance you may lose some, or all, of your original investment if the borrower cannot repay the loan.

You can invest your full £20,000 ISA allowance into an Ifisa or you can choose to split it across other types of ISAs.

Some Ifisa providers require a minimum deposit to open an account. The size of the deposit varies; it might be as little as £1 but it could be much more. It’s important to check the terms of the account before you commit.

Although innovative finance ISAs can lead to high returns, any form of peer-to-peer lending comes with considerable risks. The level of risk varies from platform to platform, so make sure you do your research.

Some of the general risks associated with an Ifisa include:

• No protection – unlike money in cash ISAs or other savings accounts, funds in an Ifisa aren’t protected under the Financial Services Compensation Scheme (FSCS). This means you might lose your money if you’ve invested through a company that later goes out of business
• The borrower may default – if the borrower is unable to repay the loan you might earn less than the target interest rate or, in some cases, lose your investment. While many large providers have a contingency fund to protect investors against defaulting, there’s no guarantee you’ll be covered. There’s also a chance you won’t be protected if several borrowers default at the same time.
• Difficulty accessing your cash – withdrawing your savings from an Ifisa can be a slow process. It could take a few months until you receive your money, so bear this in mind when planning your finances.

Despite being a higher-risk product, innovative finance ISAs can be an important part of a balanced savings and investment portfolio. If you’re risk-averse, you might want to experiment with a relatively small sum of cash. Still not sure? If you’re in any doubt, speak to a financial advisor. They can suggest a range of suitable savings products that can maximise your returns while mitigating risk.

You can open an innovative savings account alongside your other ISAs, providing you don’t exceed the £20,000 annual contribution limit across all of your accounts. For example, in the 2024/25 tax year you could pay £4,000 into a stocks and shares ISA, £8,000 into a cash ISA, £1,000 into a lifetime ISA and £7,000 into an Ifisa.

It’s also possible to hold multiple innovative finance ISAs, but you can only open and make contributions into one Ifisa in each tax year.

Yes, you can transfer funds from your other ISAs into an innovative finance ISA but certain rules apply. If you wish to move money from a cash, or stocks and shares, ISA, you will have to transfer the full amount. If you’re transferring funds from older ISAs that were opened in previous tax years, you can choose how much money to move. Savings from previous tax years do not count towards the current year’s annual ISA allowance.

If you do want to make a transfer you’ll need to request a transfer form from your Ifisa provider, who will manage the process on your behalf. You shouldn’t withdraw and then reinvest your savings yourself as this will count towards your ISA allowance for the current tax year.

Before making your transfer, check you won’t be penalised by your existing ISA provider.

There are several factors to consider when looking for the best innovative finance ISA. These include:

• The target rate of interest (but remember this is not guaranteed)
• The length of the term
• The level of risk and how diverse your peer-to-peer lending portfolio is
• The minimum deposit
• Management fees or penalties

When it comes to choosing a peer-to-peer lending platform, it’s important to do your homework. Innovative finance ISAs are relatively new to the marketplace and some providers have gone out of business over recent years. Before committing your savings, check the platform’s history and past performance. You should also find out whether they have a reserve fund in place to protect your investment against borrowers who default on their loan.

If possible, speak to an independent financial adviser. They can help you assess your risk profile and choose the right savings product to meet your financial goals.

Ifisas are just one of several different types of ISAs currently available. The other options are:

• Cash ISA – including instant access ISAs, regular savings ISAs and fixed rate ISAs
• Stocks and shares ISA
• Lifetime ISA
• And, for younger savers, a junior ISA.

Which type of account is best for you will depend on your savings goals and individual circumstances.

It’s also worth noting that while ISAs provide a tax-free way to save, the majority of people won’t pay tax on their income from savings thanks to the personal savings allowance (PSA). This means it might be worth considering non-ISA savings accounts and products, such as fixed rate bonds.

Fixed rate bonds provide a competitive interest rate if you lock your money away for a set period. Unlike an Ifisa, the interest rate is guaranteed – plus they’re risk-free. Fixed rate bonds work in a similar way to fixed rate ISAs, although there is no £20,000 cap and any interest that exceeds your PSA is taxable. Read our article – Fixed rate bonds vs ISAs – for further details.

While we don’t currently offer ISAs, there is an excellent range of fixed rate bonds available on the Raisin UK marketplace. All you need to do is register for a Raisin UK Account and choose your preferred partner bank to open an account with. It only takes a couple of minutes and registration is completely free.

Find out more about how to apply by reading our guide to opening a fixed rate bond.