ISA or savings account

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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 what is the best ISA or savings account for you?

The rundown
  • Variety of options: There are different types of ISAs and savings accounts to choose from, each catering to different financial preferences and goals
  • Tax distinction: With ISAs, you can save up to £20,000 tax-free, while savings accounts allow you to earn up to £1,000 or £500 per year in interest, depending on your income tax band
  • Choosing a savings account: When choosing between an ISA or savings account, it can help to consider how much you want to save and the amount you wish to deposit

What is an ISA?

An ISA, short for Individual Savings Account, is a tax-free savings account that typically offers 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. Instead of a simple cash ISA vs savings account comparison, it’s worth considering each type of ISA in detail. 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 away 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. IFISAs 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, lifetime ISAs are intended to help you buy your first home or save for retirement. With a savings limit of £4,000 per financial year, the government adds 25% to your savings, up to £1,000 per year, until you turn 50.

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What is a savings account?

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.
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Source: https://www.moneysupermarket.com/savings/cash-isas/

What are the advantages and disadvantages of an ISA?

Advantages:

  • 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.
  • 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.
  • An ISA is a safe place to save your money without any investment risk. Savings deposited into ISAs offered by UK regulated banks are usually protected up to £85,000 per person, per banking group with the FSCS.

Disadvantages:

  • Depending on the ISA account you choose, you may have to commit to locking away your cash for a set amount of time.
  • The interest rates on ISAs can be variable, potentially offering lower returns compared to other savings accounts.
  • Your contribution to an ISA is capped at a maximum of £20,000 per tax year.

What are the advantages and disadvantages of savings accounts?

Advantages:

  • 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.

Disadvantages:

  • Some savings accounts may have restrictions on accessing your money, such as withdrawal limits or penalties for early withdrawals.
  • You may have to pay tax on interest earned in savings accounts, reducing the overall returns on your savings.

What's the difference between an ISA and a savings account?

When it comes to tax, the main difference between ISAs and savings accounts is that ISAs offer tax-free interest payments. With an ISA, you won’t be taxed on savings of up to £20,000 per tax year. With a savings account, however, 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 known as the ‘ISA allowance’ and currently stands at £20,000 per person across all the types of ISAs you hold.

Carefully considering these differences can help you decide whether an ISA or savings account better suits your financial situation.

 

ISA vs savings account comparison

ISA Savings Account
Completely tax-free Interest is taxed if you earn over £1,000 as a basic-rate taxpayer, or £500 as a higher-rate taxpayer per year
You can only deposit up to £20,000 a year No limits on deposits
Limited to opening one type of ISA a year No limits on how many accounts you can open
Good for large amounts and long-term savings Good for small amounts and short-term savings

Should I open an ISA or a savings account?

Whether you should open a savings account or an ISA depends on your needs and savings goals. ISAs tend to be popular for longer-term savings, while other savings accounts may be used for short-term savings. 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 earned interest, this could be a good option. If flexibility is important for you, some savings accounts also let you easily make withdrawals and top up your funds.

It doesn’t have to be an “either-or” decision. For instance, if you plan on saving over £20,000 per year, you could save up to this amount in an ISA and anything over it in a savings account. Alternatively, you could simply deposit your money into one savings account.

Comparing savings accounts at Raisin UK

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

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