Innovative Finance Isas explained

Innovative Isas help you earn tax-free interest on peer-to-peer lending. Find out more about the different types available and the rates on offer
Megan ThomasResearcher & writer

What is an innovative finance Isa, or Ifisa?

An innovative finance Isa (Ifisa) is an Isa that contains peer-to-peer loans instead of cash Isa or stocks and shares isa.

Peer-to-peer lending matches up investors with borrowers, who could be individuals, businesses, or property developers.

And because you're cutting out a bank by investing your money through an online portal - known as peer-to-peer lenders - you tend to earn higher rates of interest than a traditional savings account. However, your money is at risk.

This guide explains how Ifisas work and whether you really need one.

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Is peer-to-peer investing right for you?

Peer-to-peer lending involves considerable risks, and several platforms have collapsed in recent years.

The FCA imposed stricter rules in 2019 for peer-to-peer platforms to protect less experienced investors.

Under marketing restriction rules imposed by the regulator in 2019, peer-to-peer platforms may only communicate 'direct-offer financial promotions' to retail clients that are classified as either:

  • certified high-net worth investors
  • certified sophisticated investors
  • self-certified sophisticated investors
  • investors who are certified as 'restricted investors'.

However, peer-to-peer investments are still high-risk products, with limited protections should the borrower default. Some platforms offer contingency funds, but these don't guarantee to repay all investors.

Unlike stocks and shares investment platforms, peer-to-peer platforms are not protected by the Financial Services Compensation Scheme should they collapse.

And unlike savings accounts, returns are not guaranteed, and past performance does not serve as a reliable guide to future performance. You could face waits of several months to withdraw your money.

How does my innovative finance Ifisa allowance work?

In the 2023-24 tax year, you can save up to £20,000 into Isas. This can be a mixture of cash, stocks and shares or an innovative finance Isa.

So, to use up your allowance, you could put:

  • £10,000 in a cash Isa
  • £5,000 in a stocks and shares Isa
  • £2,500 in a innovative finance Isa
  • £2,500 in a lifetime Isa.

It's worth noting that you have a statutory right of cancellation for 14 days after opening the account.

You can only open one new innovative finance Isa with one single provider each tax year.

How can I transfer into a innovative finance Ifisa?

When it comes to transferring your Isa savings to an Innovative finance Isas, the rules are similar to those for transfers to cash or stocks and shares Isas.

However, you can transfer any money that's already within a cash Isa or stocks and shares Isa to an innovative finance Isa offered by a peer-to-peer provider.

If you want to transfer your cash or stocks and shares Isa savings from the current tax year, you have to transfer the full amount; but you can transfer as much or as little as you like from Isas you've held in previous years, without affecting this year's £20,000 Isa allowance.

The process will work like this:

  1. To transfer your Isa, you should complete a transfer form with the innovative finance Isa provider you want to switch to;
  2. Don't withdraw your money out of your other Isas to transfer, as it could impact on your current Isa allowance;
  3. Transfers take place in cash - so if you hold stocks and shares Isas, all of your investments would be sold and the cash would be used to invest in peer-to-peer loans;
  4. Transfers to innovative finance Isas should take no more than 30 working days.

Key Information

Can I transfer existing peer-to-peer loans to an Ifisa?

As it stands, you will not be able to simply transfer your existing peer-to-peer investments into an innovative finance Isa when the site you invest with launches one.

Through a quirk in regulation, you would have to sell them - incurring any early exit charges that apply - and then make those loans again at whatever new rate applies at the time.

This means you can't just make non-Isa loans now and bring them into your Ifisa when you open one.

How to assess the risks of Ifisas

There are some important things to consider when choosing an Ifisa provider, including:

  • The platform's track record - several have collapsed or been bought out in recent years
  • How spread out your investments are across borrowers to achieve a diversified portfolio
  • What protections are offered by the platform should it be in trouble or go bust
  • Whether or not you'll be able to transfer your Ifisa if needed
  • How you can access your money, and any charges it could impose if you want to withdraw cash early.

If you can, seek independent financial advice to help you identify your risk profile and long term goals.

Do I need an Ifisa?

Whether or not you need an innovative finance Isa will depend on the rate of tax you currently pay, how much you are prepared to invest and the rate of return you expect to receive.

The first £1,000 of interest earned by basic-rate taxpayers is paid tax free, while higher-rate taxpayers can earn £500 free of tax. The Personal Savings Allowance applies to interest earned on peer-to-peer lending.

But think carefully about the level of risk that you are taking with peer-to-peer lending - and don't simply choose the company because it offers an Isa.

What other types of Isa are there?

Ifisas are just one of several types of Isas, some of which can hold investments. Others include:

  1. Cash Isa - effectively a tax-free savings account
  2. Stocks and shares Isa - holds cash but also shares, investment funds and investment trusts
  3. Lifetime cash Isa - similar to cash Isas, but with a separate £4,000 annual allowance, a 25% government top-up and strict withdrawal requirements
  4. Lifetime investment Isa - similar to lifetime cash Isa, but holds cash and investments
  5. Junior cash Isa - tax-free savings accounts for under-18, with a separate £9,000 annual allowance
  6. Junior investment Isa - similar to a Junior cash Isa, but holds cash and investments