What is an innovative finance ISA?

It is the third type of ISA that exists alongside the cash ISA and the stocks and shares ISA. Here is how the innovative finance ISA works.

Share this guide

An innovative finance ISA lets you use your tax-free ISA allowance while investing in peer to peer (P2P) lending. 

P2P lending is a form of investing where you directly lend money to borrowers and businesses. The borrowers then pay back the borrowed amount, with interest on top. 

The interest they pay is the return you get on your investment. You earn this interest tax-free.

Investors (IFISA holders) are matched up with borrowers. A borrower could be a business, an individual or a property developer.

So, with an innovative finance ISA, your ISA account contains P2P loans. With a cash ISA it contains cash and with a stocks and share answer it contains stocks and shares.

Find out more about P2P lending here.

How does an IFISA work?

An IFISA works by lending your money to borrowers in return for a set amount of interest. The calculations are based on how long you’re prepared to leave your money untouched for.

You’re allowed to pay your full ISA allowance into your innovative ISA, if you choose to. For the 2020/21 tax year, the ISA allowance is £20,000 in. The tax year runs from 6th April to the 5th April. 

Compare innovative finance IFISAs here.

What are the risks associated with having an innovative ISA?

While an IFISA can be great for some people, there are also lots of risks associated with having one.

It’s a much riskier option than a cash ISA, although you could earn more interest. You can reduce risk by spreading your cash across multiple loans.

The risks include … 

  • Defaulting: An innovative ISA works like a loan. That means there is a chance the borrowers could default on their repayments. 

  • Contingency fund: Most of the companies that offer innovative finance IFISAs have a backup or reserve fund set up. It’s a way of protecting your money against any borrowers who default on their repayments, which is great. But you should be aware that this fund may not cover you if multiple borrowers default at the same time.

  • Not protected: An innovative ISA isn’t protected under the Financial Services Compensation Scheme (FSCS). This means your money could be at risk if you save with an IFISA company that goes bust.

  • Slow cash withdrawal: If you want to withdraw money from your innovative finance ISA, be aware that this process can be slow. You may have to wait some time before you can access your money.

Choosing an IFISA 

When it comes to choosing an innovative finance ISA, you need to look at factors including:

  • how long you’ll have to tie your money up for 

  • what return you’ll get

  • minimum deposits

  • management costs.

You’re looking for high returns and low (or no) fees.

How many innovative finance IFISAs can you have?

You can only open and pay into one IFISA in each tax year. But you can also pay into a cash ISA and a stocks and shares ISA, too. You just need to make sure you don’t exceed your ISA allowance across all your ISAs. Your ISA allowance is £20,000 for the 2020/21 tax year.

For example, you could pay £5,000 into a cash ISA, £3,000 into a stocks and shares ISA and still pay in up to £12,000 into an IFISA. The amount in each ISA can be split however you like, as long as it doesn’t exceed £20,000 across all three.

It’s also possible to transfer your ISAs from previous tax years into separate innovative finance IFISAs. But you can only add further funds into one per tax year.

Can you transfer other ISAs into an innovative finance ISA?

Yes, you can. But you should check for any restrictions with your existing ISA provider, so you can make sure you won’t be penalised for transferring.

You can transfer all of your cash and stocks and shares ISA money into an IFISA. It takes up to 30 days. But there are rules around transfers into innovative finance IFISAs. These include:

  • If you’re transferring this year’s savings from your cash ISA or stocks and shares ISA, you have to transfer the full amount.

  • If you’re transferring savings from older ISAs that aren’t from this year, you can choose how much to transfer. It won’t affect your ISA allowance for the current year at all.

Ask the IFISA provider that you’re switching to for a transfer form. They’ll do the rest. You definitely shouldn’t withdraw the cash, because when you put it back in, it could affect your ISA allowance for the year. 

How much can you earn from an IFISA before paying tax?

If you’re a basic rate taxpayer or a higher rate taxpayer, you can earn tax-free interest as part of your Personal Savings Allowance. 

A basic rate taxpayer can earn £1,000 in interest tax-free. A higher rate taxpayer can earn £500 in interest tax-free.

When you decide whether to get an innovative finance ISA, you should take your tax bracket into account.

Who offers innovative finance IFISAs?

Many P2P lenders are still waiting for full Financial Conduct Authority authorisation. Until they get that, they can’t offer IFISAs.

Many P2P lenders are still waiting for full Financial Conduct Authority authorisation. Until they get that, they can’t offer IFISAs.

But many companies have already announced their headline rates ready for when they get FCA authorisation.

Innovative Finance ISAs

Maximise the value of your savings by hunting down the best rates available.