What Is An Innovative Finance ISA?

Innovative finance ISAs are a niche product, but changes from April 2024 could broaden their scope and make them easier to access.

Updated: May 20, 2024
Elizabeth Anderson

Written By

Elizabeth Anderson

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There are four types of adult ISAs: cash, stocks and shares, innovative finance and lifetime ISA. 

Most people will have the cash or stocks and shares option, unless you are saving for a house or pension with the lifetime ISA. 

Innovative finance ISAs are aimed at those willing to take a higher level of risk with their savings. They are still a niche product, but innovative finance ISAs will be expanded in the 2024/25 tax year as part of the government’s wider aim to make ISAs simpler to navigate.

So is an innovative finance ISA worth considering and what do you need to know? In this article we’ll explain how they work and where you can open one.

How innovative finance ISAs work

Innovative finance ISAs were launched in April 2016, allowing you to invest your savings in peer-to-peer loans or crowdfunding projects through the benefit of a tax-free wrapper. 

Peer-to-peer lending is where investors loan money to businesses or individuals. You are then repaid over time, with interest. Like with all types of ISAs, any returns or growth are tax-free.

The most you can pay into all adult ISAs is £20,000 each tax year. So you could potentially pay £20,000 into an innovative finance ISA but realistically you are likely to hold a few types of ISAs and therefore the limit may be reduced. From April 2024, you will be able to pay into multiple innovative finance ISAs in the same tax year.

Just 17,000 innovative finance ISAs were opened in the 2021/22 tax year, compared with 7.1 million cash ISAs and 4 million stocks and shares ISAs, the latest government data shows. So the innovative finance ISA is a niche product that only appeals to a small percentage of savers.

Peer-to-peer lending is higher risk, as borrowers could default and not repay the money. 

Innovative finance providers are not covered by the Financial Services Compensation Scheme (FSCS), so your money could be lost if your provider goes out of business.

How to open an innovative finance ISA

Innovative finance ISAs are currently offered by just a handful of providers. Former major players such as RateSetter and Zope have exited the market in recent years.

Innovative finance ISAs are regulated by the Financial Conduct Authority (FCA) so will adhere to strict rules to increase savers’ protection, although as mentioned they are not covered by the Financial Services Compensation Scheme.

Innovative Finance ISA providers in the UK:

Provider name
Minimum investment
Targeted interest rate* p/a
Secured business loans
Up to 10.06%
Ethical finance
Not specified
Student finance
Up to 9%
Secured business loans to UK firms
UK entrepreneurs
6% – 18%
5.5% – 10%
Up to 12%
*Interest rate is not guaranteed

There is a full list of ISA providers approved by HMRC here, and you can search by innovative finance. 

Innovative finance ISA providers include:

1. Kuflink

Invest in a portfolio of secured loans through the Kuflink innovative finance ISA. 

Estimated returns: Up to 10.06%  p/a. Advertised returns are never a guarantee. 

Minimum investment: £1,000

2. Triodos

Triodos is an ethical bank that offers the ability to invest in organisations and projects making a positive impact socially, culturally and environmentally.

Estimated returns: Not given.

Minimum investment: £50

3. Lendwise

Lendwise is a peer-to-peer finance lender specialising in education finance, matching postgraduate students with lenders to fund their studies — whether that’s for an MA, PhD or MBA. 

Estimated returns: Up to 9% p/a

Minimum investment: £1,000

4. Folk2Folk

Folk2Folk offers business loans to small businesses across Britain including property renovators and developers, country hotels and pubs, food and drink producers, farmers seeking to diversify, manufacturing businesses, yoga studios and cafes.

Estimated returns: 8.5% p/a

Minimum investment: £20,000

5. Crowd2Fund

The Crowd2Fund innovative finance ISA lets you in British businesses. 

Unlike some other peer-to-peer platforms, your money is not pooled with other investors to spread across several firms. Instead you choose individual businesses you loan money to, so this can be higher risk as you are focused on a small number of companies.  

Estimated returns: 6% to 18% p/a before fees and bad debt.

Minimum investment: £100

Why open an innovative finance ISA?

When innovative finance ISAs were launched eight years ago, the appeal was that higher-risk peer-to-peer investments could potentially give higher returns at a time when interest rates were at rock bottom. Some providers were offering potential returns of up to 6%.

But as the Bank of England’s base interest rate has risen — currently standing at 5.25% — there is less need to take a risk with savings. The top-paying cash ISAs now pay interest of around 5 per cent, so many savers can access more reasonable rates in a safe cash account without needing to take risk to achieve higher returns. 

With a stocks and shares ISA, there are no fixed returns — growth will depend on the performance of your investments. But over the long-term, returns in investment ISAs typically outperform cash ISA returns. 

From April, more investments beyond peer-to-peer lending will be allowed inside an innovative finance ISA, which could widen the ISA’s appeal. Long-term asset funds and open-ended property funds with extended notice periods can be included in innovative finance ISAs from the 2024/25 tax year.

A long-term asset fund allows you to invest in illiquid assets such as property and private equity — assets that are difficult to sell quickly.  

Open-ended property funds invest in commercial property such as shopping centres or office blocks. 

What are the risks of innovative ISAs?

When loaning money, your borrower could default and not repay the money — meaning you lose some of your cash along with any interest that should have been paid.

There is also the risk the platform where you have your innovative finance could go bust. Innovative finance providers are not covered by the Financial Services Compensation Scheme (FSCS), so your money could be lost if your provider goes out of business.

It can also be difficult to cash out of peer-to-peer lending investments if you want your money back. Unlike with a cash savings account or traditional stock market investment account, you cannot instantly get your money back. It may take time for the loan to be sold to another investor — likely even several years.

Finally, investing all your savings in peer-to-peer would mean you are concentrated on a niche, high-risk sector. It’s best to invest a small percentage of your total investment portfolio — less than 10% — in high-risk investments. Only put in what you are prepared to lose.

Ideally as an investor you would choose a diverse range of investments to reduce the chances of losses. For example, you could invest in mutual funds or ETFs. Many novice investors steer clear of high-risk investments completely. 

Can I transfer to an innovative finance ISA?

You can transfer money held in other types of ISAs to an innovative finance ISA, as long as you are transferring the money as cash rather than an investment.

If you are transferring money from an investment ISA, your provider will simply sell and cash in your investments and transfer the money.

To transfer, open an account with your desired provider and select the ‘transfer’ option. Your new provider will then do all the leg work but you will have to sign with your permission. Transfers can take up to 30 days.

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