Last updated: May 2026 · Sourced from official UK government publications
Plain-English explainer. All rules drawn from HMRC and gov.uk. Not financial advice. See disclaimer below.
Yes, with a caveat. A Cash Lifetime ISA earns interest like a regular savings account. A Stocks & Shares Lifetime ISA grows through investment returns, not interest. Both types also receive the 25% government bonus on contributions up to £4,000 a year. Below is exactly how each kind of return works.
A Cash LISA pays a variable or fixed interest rate, set by the provider. As at 2025/26, typical Cash LISA rates have been in the 3% to 5% AER range, broadly tracking the Bank of England base rate. Interest is normally paid monthly or annually into the LISA, where it remains tax-free.
Cash LISAs are commonly used by savers with a shorter time horizon, for example first-time buyers planning to buy within 1 to 5 years. The headline appeal is the 25% government bonus rather than the interest itself: even at 0% interest, putting in £4,000 produces £5,000 once the bonus lands.
A Stocks & Shares LISA holds investments rather than cash. Returns come from three sources: capital appreciation (the value of the investments going up), dividends paid by shares, and interest paid by any bonds held in the underlying fund. None of this is ‘interest’ in the traditional sense, and the value can fall as well as rise.
Long-run UK equity returns have averaged around 5% to 7% per year above inflation, but past performance is not a guide to future returns and short-term losses are possible. Stocks & Shares LISAs are typically appropriate for longer holding periods (5+ years).
The 25% government bonus is the headline LISA feature and is independent of interest or investment returns. It pays £0.25 for every £1 you contribute, up to £1,000 a year on the £4,000 contribution cap. The bonus is paid by HMRC monthly, typically 4 to 9 weeks after each contribution. For more on timing, see when the government pays your LISA bonus.
Unlike interest, the bonus is set by statute and does not move with the base rate or the market. As long as the LISA rules are met, the 25% is paid in full.
The simplest comparison is between a non-ISA savings account and a Cash LISA over a single tax year, with £4,000 contributed.
The bonus typically dominates the comparison even at lower interest rates. The trade-off is the LISA’s 25% withdrawal charge if you take the money out for anything other than a first home or retirement.
All interest, dividends, and capital gains inside a LISA are exempt from UK Income Tax and Capital Gains Tax. There is no annual reporting requirement for the saver. Over decades, this compounding effect can be substantial. As an illustration, £4,000 contributed each year from age 18 to 50 with a 5% real return would compound to roughly £360,000 by age 60, with no tax due. Actual returns will vary.
Use the LISA calculator to model your own contributions, growth assumption, and time horizon.
Cash LISA interest payment frequency varies by provider:
Interest paid into the LISA stays inside the wrapper and continues to compound tax-free.
Cash LISA rates rise and fall with the Bank of England base rate. FinanceSimply covers every move in plain English.
Subscribe free →Cash LISAs earn interest. Stocks & Shares LISAs grow through investment returns, not interest. Both receive the 25% government bonus.
3% to 5% AER over the past two years, varying by provider and base rate movements. The 25% bonus is separate and on top.
Yes. HMRC pays 25% on every qualifying contribution up to £1,000 per tax year. The bonus is statutory.
Yes. Investment value can fall as well as rise. Bonus contributions are still paid, but total balance can be below the amount contributed.
The ISA wrapper exempts interest, dividends, and capital gains from UK Income Tax and CGT for as long as the money stays in.