The Innovative Finance ISA, or IFISA, is one of the four main types of ISA available to UK investors. Unlike Cash ISAs or Stocks and Shares ISAs, an IFISA allows you to invest in peer-to-peer lending or certain types of debt-based securities, with interest and returns sheltered from tax. These accounts can potentially offer higher returns than traditional savings products, but they also come with significantly higher risks.

In this guide, we will explain what an IFISA is, how it works, who it is suitable for, and the key risks you need to consider before investing.

What Is an Innovative Finance ISA?

An Innovative Finance ISA is a tax-free investment account designed to hold peer-to-peer (P2P) loans and other eligible debt-based investments. When you invest through an IFISA, you are essentially lending your money to individuals, businesses, or property developers via an FCA-authorised platform. In return, you receive interest payments, which are tax-free as long as they are within the ISA wrapper.

The IFISA was introduced in April 2016 to give investors more choice beyond cash savings and traditional stock market investments.

How Does an IFISA Work?

Here’s the basic process:

• You open an IFISA with an authorised provider.
• You deposit funds, up to your annual ISA allowance (£20,000 for the 2025/26 tax year).
• The provider allocates your money to loans or investments listed on their platform.
• You receive interest payments, which may be paid monthly, quarterly, or at the end of the loan term.
• At the end of the loan, your capital is repaid (if the borrower has not defaulted).

Potential Returns

IFISAs can offer returns in the range of 4% to 10% per year, depending on the type of loans and the level of risk. These rates are usually higher than Cash ISAs and can sometimes outperform Stocks and Shares ISAs over short periods. However, higher returns generally mean higher risk.

Risks of Innovative Finance ISAs

Unlike Cash ISAs, your money is not protected by the Financial Services Compensation Scheme (FSCS) if the borrower or the platform fails. The main risks include:

• Borrower default: If borrowers fail to repay, you may lose part or all of your investment.
• Platform failure: If the lending platform collapses, your funds may be difficult or impossible to recover.
• Liquidity risk: Many IFISA investments are locked in for fixed terms, and you may not be able to withdraw early.
• Economic downturn: In tough economic times, default rates may rise sharply, reducing returns.

IFISA vs Other ISAs

Who Is an IFISA Suitable For?

An IFISA might be worth considering if you:

• Understand and accept the risks of P2P lending
• Are looking for potentially higher returns than Cash ISAs
• Can tie up your money for a set period
• Have other lower-risk investments for diversification

It is generally not recommended to put all of your ISA allowance into an IFISA unless you have a very high risk tolerance.

Tax Benefits

Any interest earned within an IFISA is completely free from income tax. You also do not pay capital gains tax on profits. However, the lack of FSCS protection means you could lose money if investments fail.

How to Open an IFISA

1. Research FCA-authorised IFISA providers and compare their terms.
2. Decide how much of your ISA allowance to allocate to the IFISA.
3. Open the account online and transfer funds (either new contributions or by transferring an existing ISA).
4. Select your investments or allow the platform to allocate for you.

Final Thoughts

The Innovative Finance ISA offers an alternative way to invest tax-free, with the potential for attractive returns. However, the risks are significantly higher than with traditional ISAs, and there is no safety net from the FSCS. For many investors, an IFISA can form part of a diversified portfolio, but it should be approached with caution.

Frequently Asked Questions