How to transition from saving to investing using an ISA (the halal way)
For many people, saving feels like the simplest and safest choice. You earn, you store, and you wait. But when money sits in accounts earning little or no return, its purchasing power can diminish over time due to inflation, and for Muslims in the UK, many conventional high-interest accounts are not compatible with Islamic principles.
Understanding the shift from saving to halal investing, and how ISAs can support that transition, may help individuals build long-term financial resilience in a way that aligns with their values.
Why ISAs can support a halal investing journey
An ISA is not an investment itself. It is a government-approved account that protects eligible savings and investments from:
- UK Income Tax
- Capital Gains Tax
Crucially, you do not pay tax on interest, income or capital gains from investments in an ISA.
The annual ISA allowance is £20,000 for the 2025/26 tax year.
ISA categories include:
- Cash ISA
- Stocks & Shares ISA
- Lifetime ISA (LISA)
- Innovative Finance ISA
To learn more about the different types of ISA available, read our article ‘What Is An ISA?’.
From a Shariah perspective, the ISA wrapper is neutral. What determines permissibility is what sits inside the ISA and whether it contains interest-based products or Shariah-compliant assets.
Step 1: Build a halal emergency fund
Before investing, many people choose to maintain a financial buffer for unexpected expenses.
A common recommendation is to have three to six months of essential expenses available in an emergency savings fund.
Source: MoneyHelper – Emergency Savings
A Cash ISA from an Islamic bank is one option for Muslims seeking a halal structure for this savings buffer. Islamic banks such as Al Rayan Bank and Gatehouse Bank use Shariah-compliant contracts and pay an Expected Profit Rate (EPR) instead of interest.
This may help savers avoid riba while keeping funds accessible.
Step 2: Match your goals to the right type of ISA
Your time horizon (how long you plan to save or invest) may influence which ISA structure you choose.
Shorter-term goals (usually under five years)
Market fluctuations can have a greater impact over shorter periods, so some people prefer halal cash-based options for these objectives.
Longer-term goals (five to ten years or more)
Investing introduces risk, but over longer periods it may offer greater potential for growth. MoneyHelper explains:
“Investments can go up or down in value, but over the long term they usually perform better than cash savings.”
Source: MoneyHelper – Should I save or invest?
NOTE: This is a general observation rather than a prediction.
A Shariah-compliant Stocks & Shares ISA allows Muslims to access equities, Sukuk, and gold while screening out prohibited industries and interest-based financial structures.
Step 3: Understand the Lifetime ISA (if eligible)
The Lifetime ISA (LISA) is available to adults aged 18 to 39. GOV.UK explains that you can:
- Contribute up to £4,000 per year, and
- Receive a 25% government bonus (up to £1,000 annually)
Source: GOV.UK – Lifetime ISA
LISA funds may be used for:
- Buying a first home (within specific criteria), or
- Retirement (withdrawable from age 60)
Withdrawals made for other reasons generally incur a government charge.
A Cash LISA from a conventional bank pays interest, so Muslims seeking Shariah compliance often prefer a Stocks & Shares LISA holding halal assets.
The bonus itself is generally viewed by scholars as a government incentive rather than interest, although opinions may vary.
Step 4: Use automation to stay consistent
Some individuals choose to automate their contributions through monthly deposits into their ISA. This approach is often called pound-cost averaging, meaning the same contribution is made each month regardless of market conditions. This can reduce the emotional impact of market volatility.
Before the end of each tax year (5 April), people often review:
- How much of their ISA allowance they have used
- Whether their holdings remain Shariah-compliant
- Whether their portfolio still aligns with their goals
HMRC also notes that some providers offer flexible ISAs, allowing savers to withdraw and replace money within the same tax year without reducing their allowance.
Source: HMRC – How ISAs Work
How an ISA remains halal
An ISA is halal only if its underlying assets align with Islamic principles.
Halal examples
- Cash ISAs structured through Islamic banks using EPR profit mechanisms
- Stocks & Shares ISAs holding Shariah-screened equities, Sukuk, or gold
Not halal
- Cash ISAs paying conventional interest
- Portfolios containing conventional bonds or interest-based institutions
- Exposure to prohibited sectors (e.g., alcohol, gambling, pork, arms)
Shariah-compliant investment providers often include:
- Ongoing screening
- Shariah supervisory oversight
- Purification processes (e.g., donating incidental non-compliant income to charity)
Illustrative example: transitioning from saving to investing
Below is an example scenario using the FCA’s standard projection rates (low 2%, mid 5%, high 8%).
These are not forecasts and do not represent future performance.
Scenario:
Someone contributes £3,600 per year (£300/month) into either:
- Option A: A Cash ISA at 0% growth (illustrative only; actual EPRs vary)
- Option B: A Shariah-compliant Stocks & Shares ISA
After 10 years, the projected amounts could be:
Source: FCA – COBS 13 Annex 2 (Projection Rate Guidelines)
These figures are illustrative only and returns may be lower or higher.
Interested to see how much you could potentially earn by investing through an ISA? Try out our ISA Scenario Explorer tool.
Common questions
Can I open more than one ISA?
As of 2025/26, you can subscribe to more than one type per tax year.
Source: HMRC – ISA Rules
Can I transfer my ISA?
Yes. Transfers between providers do not affect your allowance if done through the official transfer process.
Are ISAs still beneficial under current tax rules?
As long as UK legislation continues to grant ISAs tax-exempt status, they may remain useful for those seeking tax-efficient structures. Future tax rules could change depending on government policy.
A simple, values-aligned approach
Transitioning from saving to halal investing does not need to be complicated. ISAs offer a tax-efficient structure, and Shariah-compliant investing provides a way to grow wealth while remaining aligned with Islamic principles.
This article is for educational purposes only and does not constitute financial advice.
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