ISA vs SIPP: how do they differ?

by InvestEngine

Choosing between a SIPP and ISA is a significant decision for those seeking tax-efficient investment accounts. In this comparison, we’ll provide key information about both options to help you make an informed choice.

SIPP vs ISA: the basics

SIPPs and ISAs share similarities as both are designed for saving, providing stock market access, and offering tax efficiency. However, significant differences exist that can impact your choice.

Individual Savings Accounts (ISAs) serve as a versatile haven for investors, allowing tax-free growth on your investments. However, when it comes to allowances, ISAs operate on an annual ‘use it or lose it’ basis. As the tax year comes to a close, any unused ISA allowance does not roll over to the next year. It’s a use-it-now opportunity to get tax-efficiency on your investments.

In the SIPP corner, things take an interesting turn. Self-Invested Personal Pensions (SIPPs) offer investors a more forgiving landscape. The annual allowance does not just apply to the current tax year; it allows the investor to carry over unused allowances from the past three tax years. This means that, if you didn’t use your SIPP investment allowance from the last couple of years, you’ll have additional allowance to play with. 

Contributions: how much can you put in?

Both SIPPs and ISAs have annual allowances aligning with the tax year (which begins on April 6th). The current tax year allows up to £20,000 in ISAs, while SIPPs allow most savers to contribute up to £60,000, or 100% of their earnings.

Tax benefits: making the most of your money

Both accounts offer tax-free growth on investments, exempting income tax on dividends or interest. ISA tax benefits apply when withdrawing, while SIPP benefits come through tax relief on contributions and tax considerations upon withdrawal.

Stocks and shares ISA: the lowdown

  • Stocks and shares ISAs are designed as a home for your general investments
  • ISAs are tax wrappers, which means you get to keep any money you make from your investments without having to pay a penny of it to the taxman 
  • You won’t pay income tax on any UK dividends or interest and you don’t need to worry about capital gains tax if you sell your investments for a profit
  • This tax year, you can put up to £20,000 into ISAs. This allowance can go in one ISA or across different types of ISAs (e.g. stocks and shares ISA and cash ISA)
  • You can take your money out at any point and withdrawals are tax-free (although this will likely impact your annual ISA allowance)
  • People start investing in stocks and shares ISAs for all sorts of reasons. Often it’s to invest for something specific in 5, 10, or 15 years’ time or as part of retirement savings

Self-invested personal pension (SIPP): the lowdown

  • SIPPs are designed to help you build up a pension pot you can use later in life
  • You can’t access anything in your SIPP until you reach at least 55 years old (rising to 57 in 2028)
  • Most people can put up to £60,000 or 100% of their earnings (whichever is lower) into a SIPP
  • The government tops the contributions you make (up to a certain amount)
  • You have complete control when it comes to how your SIPP is invested
  • You can have a SIPP in addition to your workplace pension and ISAs (just remember both types of pension count towards your annual allowance)

Both accounts provide flexibility in your investment choices. ISAs may suit a variety of goals, while SIPPs offer greater control and tax relief, making them ideal for long-term retirement planning.

Passing on your money

ISAs form part of the estate for inheritance tax, with potential benefits for spouses. SIPPs can be passed on inheritance tax-free, with additional considerations based on age.

Which one is better for you?

Consider an ISA if:

  • You have short or medium-term goals
  • Flexibility is important to your financial plan
  • You anticipate needing funds before 55

Consider a SIPP if:

  • Retirement planning is the primary goal
  • Tax relief on contributions is appealing
  • You can commit to a long-term investment strategy


As the financial year-end approaches, consider both your ISA and SIPP allowances. Whether you’re aiming for medium-term gains or securing your retirement, understanding the intricacies of these investment vehicles is important. Remember, strategic planning, timely contributions, and a well-balanced portfolio are the keys to unlocking the full potential of your financial future.

Combining both SIPP and ISA could be a strategic approach. A SIPP for long-term retirement planning and tax relief, and an ISA for flexibility and short-term goals, can complement each other in building a well-rounded investment portfolio. Ultimately, your decision should align with your financial goals and time horizon.

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Important information

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This communication is provided for general information only and should not be construed as advice. If in doubt you may wish to consult a professional adviser for guidance.

Tax treatment depends on personal circumstances and is subject to change, and past performance is not a reliable indicator of future returns.

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