Quick history of the Innovative Finance ISA
The IFISA first popped up back in April 2016. Before that, we basically had three main types of ISA: Cash, Stocks & Shares, and (for younger savers) the Junior ISA. The idea behind the IFISA was to create a dedicated tax-free wrapper for peer-to-peer (P2P) lending and other “innovative” forms of finance—hence the name.
The UK government noticed that peer-to-peer lending platforms were booming, but there wasn’t a neat, tax-free way to invest in them. So they introduced the IFISA to let people lend money to individuals or businesses (often through P2P platforms) while enjoying the same tax benefits that come with other ISAs.
What exactly is peer-to-peer lending?
You can’t really understand the IFISA without getting a handle on peer-to-peer lending.
Essentially, P2P lending platforms cut out traditional banks, allowing you (the lender) to connect directly with borrowers. This could be individuals looking for personal loans or small businesses seeking funds for expansion.
In return for lending them your money, you earn interest—similar to how a bank would, except the bank isn’t in the equation. An IFISA takes that concept and wraps it in a tax-free package.
How is interest calculated in an Innovative Finance ISA?
The interest you earn in an IFISA typically comes from the loan agreements you enter into via a P2P platform.
If you put £1,000 into your IFISA and that money is lent out to borrowers at, say, a fixed rate of 5% per year (just as a hypothetical example), your interest would be roughly £50 over 12 months (before factoring in any platform fees or defaults). Because it’s in an ISA, you don’t pay tax on that £50.
But unlike a Cash ISA—where you might see a single, straightforward interest rate (e.g., 3% annual)—an IFISA might involve multiple loans, each with a different interest rate, loan term, and risk profile.
So your overall interest rate is sort of an average based on how your funds are allocated. Some platforms let you choose specific borrowers, while others automate the process by spreading your money across many loans, aiming to reduce the risk of defaults hitting you too hard.
Do I get a guaranteed return with an Innovative Finance ISA?
This is one of the big differences between an IFISA and a traditional Cash ISA. A Cash ISA is typically protected by the Financial Services Compensation Scheme (FSCS) if it’s offered by a UK-authorised bank or building society. That means if the bank goes bust, you’re covered up to £85,000. With IFISAs, there’s usually no guarantee by the FSCS. The returns are not guaranteed in the same way, and you could lose money if borrowers default or if the platform itself runs into trouble.
So while you might see interest rates advertised at, say, 5%, 6%, or even higher, that’s not a “safe bet” like a bank deposit might feel. It’s more of an investment than a savings account. If you love the idea of higher returns but can’t stomach potential losses, you might need to think carefully—or only invest a small portion of your savings that you’d be comfortable taking a risk with.
How to make your Innovative Finance ISA work?
Step one is usually finding a reputable P2P platform that’s IFISA-approved. The number of platforms offering IFISAs has grown over the past few years. Each platform will have its own approach—some focus on property lending, others on consumer loans, and still others on small business financing.
Once you’ve chosen a platform, you’ll need to open an IFISA account. This involves filling out some forms, confirming your identity, and transferring money in, just like you would with any ISA. You also need to decide how actively you want to manage it:
Auto-lending
Many platforms let you pick an “auto-invest” or “auto-lend” option. You choose your risk level, deposit funds, and let the platform spread your money across numerous loans. This approach is relatively hands-off.
Manual lending
If you prefer a more personal touch, some platforms let you browse a “loan marketplace.” You might see business proposals or property development pitches, each with its own interest rate and risk grade. You could pick and choose which borrowers to lend to. It’s more work, but it can feel more rewarding to back specific projects.
Make sure you keep track of your contributions because, like all ISAs, there’s a limit on how much you can put in each tax year (currently £20,000 across all your ISAs combined). That means if you’ve already put £10,000 into a Cash ISA, you can only put another £10,000 into the IFISA (or any other ISA) for that same tax year.
Is an IFISA suitable for everyone?
Short answer: no. But that doesn’t mean it’s not a brilliant tool for the right person. Here are some questions to consider:
How comfortable are you with risk?
Even though P2P platforms often have measures in place to mitigate defaults—like reserve funds or security on loans—there’s always a chance you could lose money if enough borrowers fail to repay. If you’re looking for absolutely zero risk, a Cash ISA might be more suitable.
What’s your time horizon?
If you think you might need your money in a hurry, an IFISA might not be ideal. Many P2P loans lock your funds for the term of the loan, which could be a few months or even a couple of years. Getting your money out early (if that’s even allowed) might mean penalties or having to sell your loan parts to other investors.
Do you have enough diversification?
If an IFISA is your only nest egg, you might want to be cautious. It’s generally best to have a diverse range of investments—some in cash, some in stocks, maybe property, etc. The IFISA can be part of that mix.
Are you up for some hands-on management?
If you want a “set it and forget it” approach, you’ll likely go for auto-lending. But if you actually like browsing deals and picking your own loans, that’s a more hands-on approach, which some people enjoy.
Where does the ‘interest’ actually come from with an IFISA?
Unlike a bank that pays you interest from its own pocket (and lends out the funds at a higher rate), the interest in a peer-to-peer IFISA comes directly from borrowers. They repay their loans with interest, which the platform then allocates to your account. The platform itself might charge fees to borrowers or investors to cover its operational costs, but your main source of profit is the borrowers’ interest payments.
And again, the big caveat: if borrowers don’t pay, your returns suffer. Some platforms build in a kind of “provision fund” to cover minor losses, but that’s not guaranteed to cover all defaults. So you’ll want to read the small print on how a platform handles late payments, missed payments, or full-blown defaults.
How does interest get calculated in an IFISA?
Let’s say you lend £1,000 to a single borrower at 6% interest per year, repayable in monthly instalments over 12 months. Each month, they pay some portion of the principal plus interest. By the end of 12 months, you’ve earned close to 6% (though the exact figure might be slightly lower, since you’re receiving principal back steadily, rather than all at once). If you reinvest those monthly payments into new loans right away, you can keep your money working without sitting idle in cash.
That’s a simplified example. In reality, you might spread your money across ten different borrowers, each with different rates and loan terms. Some might pay monthly, others might pay quarterly, and so forth.
You can imagine the maths can get a bit more involved—hence why many platforms do the heavy lifting of tracking everything for you. As the interest comes in, they’ll credit your IFISA balance. You can then choose to withdraw or reinvest it.
Comparing an IFISA to a Cash ISA
So which is better, well, it depends on your risk tolerance, the interest rate you are expecting and whether you want or need to withdraw the money, let’s take a look at each:
Risk vs reward
A Cash ISA from a major bank is about as safe as it gets in terms of capital protection. The FSCS guarantee (up to £85,000) means that even if the bank goes under, you’ll likely get your money back. With an IFISA, as we mentioned, there’s no such guarantee. You could earn a higher return, but the flipside is the genuine possibility of losses if borrowers default.
Interest rates
A Cash ISA might pay anywhere from 1% to 4% annually these days, depending on term and provider. IFISA rates can be higher, sometimes ranging from 3% to 10%+ (again, depends on the platform and the specific loans). Higher potential rates can be tempting, but it’s not “free money”—you’re taking on additional risk.
Access to funds
Many Cash ISAs (especially easy-access ones) let you pull out money whenever you want without penalty, though fixed-rate ISAs might lock you in for a year or more. An IFISA, meanwhile, often ties your money up in loans. Some platforms have a secondary market where you can sell your loan stakes to other investors if you need cash quickly, but there’s no guarantee someone will buy at the price you want.
How to start an Innovative Finance ISA
Pick a platform: Look for ones that are FCA-regulated, with a track record of managing P2P lending responsibly. Read reviews, check out user feedback, and see how transparent they are about defaults and fees.
Open the ifisa: You’ll fill out an application, provide ID, and link your bank account, much like any financial product.
Deposit funds: Remember your overall ISA allowance for the tax year—don’t exceed it if you’re already using a Cash or Stocks & Shares ISA.
Choose your strategy: Auto-lend or manually pick loans. Decide how much risk you’re willing to take. Often, you can specify a “conservative,” “balanced,” or “aggressive” approach if the platform offers those categories.
Monitor performance: Even if you auto-lend, it’s good to periodically log in, see if any defaults have occurred, and check how the platform is handling them.
Reinvest or withdraw: When borrowers repay loans, you can choose to reinvest that money into new loans or withdraw it to your bank account. Any gains remain tax-free as long as they’re in the ISA wrapper.
Personal recap
The Innovative Finance ISA is genuinely fascinating. It lets you put your money to work in a way that feels more direct – you know you’re helping to fund small businesses, personal borrowers, or property projects, all while trying to make a decent return. But it’s not for the faint-hearted. The risk is undoubtedly higher than a standard bank account or even a normal Cash ISA. If you’re comfortable with that and take steps to diversify your loans across multiple borrowers, it can be a rewarding addition to your financial toolkit.
If you do decide to open an IFISA, start small and get a feel for how the platform operates. Monitor your returns, see how easy (or not) it is to reinvest or withdraw funds, and decide if you like the experience.
Final thoughts
An Innovative Finance ISA sits at the intersection of higher-risk investing and the traditional ISA structure. It’s a tax-efficient way to get involved in peer-to-peer lending or other innovative financial products. You won’t have the same safety net as a Cash ISA—no FSCS protection, no guaranteed returns—but you could earn a bigger chunk of interest if everything goes well. Ultimately, it all comes down to your personal risk tolerance, your financial goals, and how hands-on you want to be.
John is an experienced finance professional having been a financial advisor and city trader for over 15 years he attained his DIPFA in 2013 and has been advising millennial and Gen Z investors and savers on ISAs, investment portfolios and personal savings in the UK.