Investing with an ISA: Your shield against inflation
By Boring Money
21 May, 2025
If your savings are languishing in a cash account, earning you a 1–2% interest, and inflation is still nipping at your heels, it’s time to look at your options. Enter: the Stocks & Shares ISA – your tax-efficient, inflation-beating superhero.
Why inflation matters
Inflation isn’t just an abstract economic concept - it has a very real impact on your everyday life and long-term financial wellbeing. At its core, inflation erodes the purchasing power of your money. When prices rise and your income or savings don’t keep pace, you're effectively getting less bang for your buck.
Let’s put it simply: If inflation is at 3%, something that cost £100 last year now costs £103. If your savings haven’t grown by at least 3%, you’ve lost money in real terms - even if the balance in your account hasn’t gone down.
This becomes an issue when you leave large sums sitting in cash accounts with interest rates that don’t beat inflation. For example, if the interest rate on your savings account is below the current rate of inflation (3.3% as of April 2026), your money is slowly shrinking in value.
Over time, even modest inflation can take a serious bite out of your financial plans:
Retirement savings lose spending power if they’re not invested to grow above inflation.
Savings for big goals (like a first home or children’s education) can fall short of the target amount needed.
Fixed-income assets, such as bonds or annuities, may offer less risk but can be particularly vulnerable to inflation's erosive effect.
The bottom line? Inflation is a silent wealth killer, especially for passive savers. It rewards those who put their money to work through investing and punishes those who let it sit idle.
How investing helps you outrun inflation
If your money stays sitting in cash over a long period of time, historical evidence shows that inflation will eventually erode its purchasing power. Investing your money instead gives it the opportunity to grow with the stock market and gives it the best chance of keeping up with the cost of living.
To illustrate this point, we’ve looked back at the performance of cash versus investments over the last 10 years. If you’d put away a single £10,000 lump sum in 2015, how much would it have been worth by the beginning of 2025? And how much more or less would you have today if you’d done things differently?
The graph below shows you how cash has performed compared to stock market shares. For the purposes of this illustration, we've looked at the growth of a single £10,000 lump sum investment in cash and in two stock market indices: the FTSE 100
and MSCI World (you can read more about these below the image).Cash vs stock markets, 2015-2025
It's clear to see that leaving your money in cash (pink) led to significantly less growth over the period between 2015-2025 than if you had invested in the stock markets. And although the British FTSE 100 Index (blue) didn't perform quite as well as MSCI World (green), it still increased by a whopping £2,182 - compared to gains of just £1,180 from cash over the same time period.
Of course, these numbers look measly compared to MSCI World's impressive £3,348 gain on the initial £1,000 investment.
Why use an ISA to invest?
So we’ve established that investing can help you protect your money from inflation, but why use an ISA specifically to do so? The answer’s just one word: tax.
ISAs – or ‘Individual Savings Accounts’ - are a type of saving and investment account which have the unique ability to shield any interest you earn from cash, dividends
or investment gains from tax. This makes the ISA a great way of squeezing the most out of your potential without having to worry about setting aside a portion of your profit for the taxman.There are four main types of ISA, each of which has a slightly different purpose:
Cash ISAs – for saving your money in cash
Stocks & Shares ISA – for investing in the stock market
Lifetime ISA – for saving for your first home or for retirement (can be in cash or stocks & shares varieties)
Junior ISA – for saving for your kids or grandkids (can be in cash or stocks & shares varieties)
Outside of an ISA, you might have to pay tax on the interest you earn on cash, dividends you receive, or investment returns you make. The main taxes that ISAs can save you from having to pay are:
Income Tax - chargeable on your total income
Capital Gains Tax - chargeable on the gains or “returns” you make on your investments over a certain amount per year (currently £3,000)
Dividend Tax - chargeable on the dividends you earn from your investments over a certain amount (currently £500)
Interest earned on Cash ISAs is also free from tax.
Making use of ISAs to shelter savings and investment from taxation is vital now that the UK tax burden is estimated to be at the highest level since the Second World War. The thresholds for paying the basic, higher and additional rates of tax remain frozen until at least 2028, dragging millions more taxpayers into higher rates of taxation as their income increases.
So you can see how investing with an ISA can save you from having to fill out complex self-assessment tax returns and faff around crunching the numbers! The bottom line is all the money earned in an ISA is shielded from UK tax. Simple as.
Best ISAs for investing in 2026
If we've successfully whet your investing appetite and you're thinking about opening an ISA, why not have a look at our hand-picked selection of the best providers on the market right now?
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