Do I need ISP isolation?
The Atmel MCU itself will generally work just fine with this type of connection. The reason being is that the SPI connection from the six pin connector is used for programming whilst the AVR is held in reset. In that mode the regular functions of the SPI controller are disconnected internally and are tristated. 

You would need to provide a bit of isolation for any of the SPI signals that may be driven by the external circuits on your board. In this specific case it does not look like any of the shift register signals are used as an output to drive back to the AVR and so no additional circuit isolation should be needed.