ISA or savings account

When you know what you want to save for, the next step is to understand which type of savings account best suits you and compare all of your options. For many people, this means comparing ISAs vs savings accounts.

One of the main differences between ISAs and savings accounts is that any interest earned on your savings account over a certain threshold is liable for tax, whereas ISAs remain completely tax-free regardless of how much interest you earn. 

But what else do ISAs and other savings accounts offer, what are all the differences between ISAs and other savings accounts and would an ISA or a savings account be right for you?

ISA stands for Individual Savings Account. ISAs are tax-free savings accounts that typically offer variable interest rates. You can save up to £20,000 per financial year (typically 6th April to 5th April) across one or more ISAs. There are four types of ISA to choose from, each providing different benefits, and it’s worth considering each type of ISA, rather than just cash ISAs vs savings accounts. Which one you open depends on your savings goals. The different types of ISA are as follows:

• Cash ISAs – similar to traditional savings accounts. Cash ISAs include:
  • Instant access ISAs – deposit and withdraw money any time you wish without penalty
  • Regular savings ISAs – earn a fixed interest rate as long as you deposit an agreed amount of money each month
  • Fixed rate ISAs – lock your money in for a set amount of time and earn a competitive interest rate
• Stocks and shares ISAs – an investment savings account that can include shares in companies, government and corporate bonds and investment funds
• Innovative finance ISAs (IFSAs) – includes peer-to-peer loans or investments you make in a business by buying its debt. IFSAs match investors with borrowers who do not want or cannot get a traditional bank loan
• Lifetime ISAs – only available if you’re over 18 and under 40, lifetimes ISAs are intended to help you buy your first home or save for retirement. With a £4,000 per financial year savings limit, the government adds 25% to your savings, up to £1,000 per year, up until you turn 50.

A savings account is simply an account you pay money into and earn interest from. There are different types of savings accounts to consider, including the following:

• Notice savings accounts. This type of savings account gives you the option of making withdrawals after a set notice period. They typically offer variable interest rates and provide the flexibility of an easy access account with the competitive interest rates of a fixed rate bond.
• Fixed rate bonds provide guaranteed returns over a set term on a lump sum deposit, usually between six months and five years. Interest rates on fixed term savings are often better than notice or easy access savings accounts and are typically more competitive the longer your term is.
• Easy access savings accounts are one of the most flexible types of savings accounts, giving you the freedom to deposit and withdraw money when you want to. Easy access accounts typically feature competitive variable rates of interest.

If you plan on saving an amount up to £20,000, then an ISA offers a tax-free option for UK savers. By saving regularly into an ISA, you can make your money work hard for you and benefit from compound interest.   

Additionally, you could pass on your ISA balance to your spouse or civil partner as a tax-free allowance in the event of your death. This isn’t something that traditional savings accounts provide. 

Savings deposited into ISAs offered by UK regulated banks are usually protected up to £85,000 per person, per banking group with the FSCS.

Savings accounts typically allow you to save up to any amount, although as with ISAs, your deposit and any interest you earn will only be protected up to £85,000 per person, per banking group with the FSCS, provided the financial institution offering them is regulated and based in the UK.

You can choose from many different types of savings accounts, each with different terms, limits and restrictions. You may also be able to earn more competitive interest rates with a traditional savings account than you can with an ISA.

The main difference between ISAs and savings accounts in tax is that ISAs offer tax-free interest payments. You won’t be taxed on savings you have in an ISA up to £20,000 per tax year. With a savings account, you can earn interest of up to £1,000 tax-free if you’re a basic rate taxpayer, or up to £500 tax-free if you’re a higher rate taxpayer.

Another key difference between an ISA and a savings account is that there’s a limit to how much money you can save into an ISA each tax year. This limit is currently £20,000 per person across all the types of ISAs you hold, and is called the ‘ISA allowance’.

Whether you should open a savings account or an ISA depends on your needs and savings goals. You’ll typically be able to earn more competitive interest rates on a traditional savings account, and as most savers don’t reach the threshold for paying tax on the interest you earn, this could be a good option. 

If you plan on saving over £20,000 per year, you could either save up to this amount in an ISA and anything over this in a savings account, or you could simply deposit your money into one savings account.

The main advantage of an ISA over a savings account is that you can save up to £20,000 tax-free, however, you’ll typically find better interest rates on savings accounts. The best savings account for you is the one that suits your savings needs.

No. An ISA is a safe place to save your money without any investment risk. However, before opening an ISA, you should check that the financial institution is protected by the FSCS (Financial Services Compensation Scheme). This means up to £85,000 of your deposit is protected.

Although we don’t currently offer ISAs at Raisin UK, you can compare and open other types of savings accounts from our partner banks through our marketplace.