Innovative Finance ISAs allow you to earn interest through peer to peer investments, whilst using your £20,000 ISA allowance so that all earnings are tax-free.

Whilst a regular cash ISA may only offer up to a few percent of interest per annum, an Innovative Finance ISA allows you to earn significantly more by investing money into a pool of borrowers who are looking for funds. Using a peer to peer lender, you are matched with individuals and borrowers who have applied for money and based on the risk you take on, the higher your return can be.

You can start investing from as little as £100, although you may need to contribute higher amounts of £500 or £1,000 to reap the largest rewards. You should bear in mind that the Innovative Finance ISA is not protected by the Financial Services Compensation Scheme which means your money could be at risk if the business goes bust.

Key Features

• Earn high interest rates per annum
• Money locked in for the loan duration
• Open an account with a deposit of just £100
• Bonuses and cashback available

Other Types of ISA

If you wish to earn interest on your money and lessen the risk, you may wish to consider looking into the main types of ISA. Perhaps the most common ISA is a Cash ISA, but an Investment/Stocks and Shares ISA is also a popular option.

Cash ISA

Cash ISAs work almost like a traditional savings account. If you’re a UK resident aged 16 or above, you should be able to open a Cash ISA and save money which earns you interest. The main difference between a bank or building society savings account and a Cash ISA is that with the former, you would need to pay Income Tax on any earnings exceeding £1,000, whereas with the ISA, you don’t pay any tax, up to £20,000.

A Cash ISA is generally seen as a safer ISA option than the Stocks & Shares ISA, as your savings won’t be affected by the ups and downs of the market.

Stocks and Shares ISA

These ISAs are also known as Investment ISAs, as your money is invested in assets such as property, bonds and shares. The benefit of a Stocks and Shares ISA is that you can keep anything you earn from your investment after fees and charges are deducted. So you don’t need to pay any tax on any capital gains you make or interest and dividends you earn, up to £20,000.

There is some risk involved with a Stocks and Shares ISA, as there is no guaranteed return, and your revenue will depend on the fluctuations in the market.

How Does an Innovative Finance ISA Work?

With an Innovative Finance ISA, you are investing in peer to peer investments. An Innovative Finance ISA allows you to use your ISA allowance of up to £20,000.

You are investing in loans for other people and businesses, including personal loans, business loans and secured loans. Each borrower will be assessed beforehand by the lender and you will earn an interest rate based on their profile and credit status. Generally speaking, good credit customers are deemed a lower risk, and therefore offer returns of around 6%. Bad credit customers pose a higher risk and therefore offer lower returns. Bad credit customers pose a higher risk and therefore offer higher returns.

Your money remains locked until the end of the loan term that you have selected. So if the borrower’s loan lasts for 3 or 5 years, you will not be able to take out your money during this time. Instead you will need to wait for the loan to run its course, or you can sell the loan to another investor on the portal.

The drawbacks are that you can only have one Innovative Finance ISA and can only invest up to £20,000 per year. However, you can also invest in other ISAs, stocks and shares, provided that it is within your £20,000 allowance.

Is My Money Protected?

No. 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.

How is an Innovative Finance ISA Different to a Peer to Peer Investment?

The main difference is that an Innovative Finance ISA is tax-free and allows you to use an allowance of up to £20,000.

Peer to peer investments require you to pay tax and state any profits on your self-assessment form. The only advantage of a P2P investment when compared to a Innovative Finance ISA is that you would be able to invest significantly more than the £20,000 limit, but you will be required to pay tax on this.

Find the Best Innovative Finance ISAs

You can use comparison sites to compare Innovative Finance ISAs and find the best one for you. You can compare deals by looking at the annual expected return (AER) and the minimum contribution to get set up e.g £1 to £1,000. Make the most of offers such as cashback, cash bonuses and other rewards to boost your returns.

Simply click on the deal and you will be taken directly to the investment website, where you can enter your deals and start saving right away!