ISA vs savings account

Wondering if you should get an ISA or a savings account? You’re in the right place.
ISA vs savings account
Updated
April 5, 2022

Table of contents

Choosing between an ISA or a general savings account doesn’t need to be a nail biter. After all, you can actually have both.

Understanding the differences between the two is a helpful way to decide which account would better suit your needs. You may find your ISA serves your long-term savings goals, while your general savings account is for your short term cash needs. Each account has different benefits, and it’s up to you to decide which makes the most financial sense for your circumstances. 

 

What is an individual savings account? 

Ah, words. They sure do have a way of confusing things sometimes.

An ‘individual savings account’ is the same thing as an ISA - just with the abbreviation unravelled.

The UK offers four different types of ISAs. The table below provides a brief outline of the differences between ISAs.

Comparing the types of ISA in the UK
Cash ISA Stocks and shares ISA Lifetime ISA Innovative Finance ISA
Purpose Savings Investments and savings Investments and savings Investments
What can you put in? Cash
Some National Savings & Investments (NS&I) products
Stocks
Investment Trusts
ETFs
Funds
Bonds
Cash
Stocks
Cash
Peer-to-peer loans
Cash
How much can you pay in? Up to £20,000 each year. Up to £20,000 each year. Up to £4,000 each year. Up to £20,000 each year.
Benefits Savings interest is tax-free

Capital protection

Easy access

Fixed-term accounts available

Tax-free growth

No UK tax on income

Tax-free withdrawals
Tax-free growth

Government pays 25% annual boost on up to £4,000

Can have higher rates than a traditional savings account.
Drawbacks Cash savings are not risk-free. The value of your cash could drop if the savings rate you receive is lower than inflation, and this can fluctuate if you have a variable rate account. Returns are not guaranteed. Investments can go up and down in value. You can only withdraw money if you're buying your first house, are over 60 years old or terminally ill. A riskier investment, meant for experienced investors. Peer-to-peer platforms are not always protected by the FSCS.


ISAs in a nutshell

One way to think about an ISA is the tax-efficient cousin to a standard savings account or general investment account. And while there's a limit on how much you can save into ISAs each tax year (which runs 6 April 2022 - 5 April 2023), once you’re money or investments are inside you won’t have to worry about any tax on the interest or dividend income you’re paid or profits (in tax speak ‘gains’) earned on any investments. 

This financial year (2022/2023) has a £20,000 deposit limit. You can plug it all into one particular ISA, or you can spread it across a few different types of ISA. 

Plenty of people choose to split their ISA allowance across both the cash ISA and stocks and shares ISA.

The cash ISA is similar to your ordinary savings account, the difference being you won’t pay tax on any interest. So you can think of cash ISAs as tax-free savings accounts.

The stocks and shares ISA will allow you to invest your money, and again, you won’t pay tax on interest, income or profits.

 

Differences between an ISA account and a savings account

Let’s first compare the cash ISA to your everyday savings account. 

The most important difference between an ISA account and a savings account is that any interest earned in your ISA is sheltered from tax. 

Usually, a cash ISA comes in one of two forms. It will either provide easy access, or fixed-term access. 

Easy access is just as it says on the tin, you can access your money whenever you please. 

Fixed-term access will only let you do so at the end of the fixed term (say, annually), as decided by your ISA provider.

Regular savings accounts also have a range of different access abilities. Some will let you dip in and out to add or withdraw funds as you please. Others might cap you at a fixed number, and then require you pay a fee if you go over it.

In an ordinary savings account, tax rules will apply. Though, they depend on a few factors which we’ve summarised below.

ISA vs Savings Account comparison
ISA Savings account
Tax No tax on any interest or income earned. Your Personal Savings Allowance (PSA) allows you to earn £1,000 in interest on savings without paying tax if you’re a basic rate taxpayer.

If you’re a higher rate taxpayer, you can earn up to £500 in interest without paying tax.

If you’re an additional rate taxpayer, you do not have a PSA.

Any earnings above those thresholds will be taxed.

Deposit limit Maximum £20,000 deposit (as per 2022/2023 tax year) once a year. No limit on the amount or frequency of deposits.
Ease of accessing money You can take your money out at any time. But for most ISAs this will affect your ISA allowance (meaning you can’t deposit those funds again). If you have a flexible ISA, your allowance won’t be impacted and you can replenish the funds you withdraw. Some savings accounts will have a limit to the number of withdrawals you can do in a given year.
Account limits Some ISA providers have a minimum to open an account. The annual limit is £20,000. Some savings account providers have a minimum to open an account too.
Long-term impact Your ISA is protected from having to pay any tax over the long term.

Your total return will depend on the interest rate you receive.

You may need to pay tax on interest earned in your savings account.

Your total return will depend on the interest rate you receive.

Risk factor There is no risk of capital loss with a cash ISA because you are not investing. You simply earn interest. But if your interest is below the rate of inflation, then you risk your money being worth less. There is no risk of capital loss with a savings account either, because you are not investing. You simply earn interest. But if your interest is below the rate of inflation, then you risk your money being worth less.

Disclaimer: Comparisons to ISA accounts are based on our understanding of the gov.uk/individual. information as at 5th of April 2022. This is shown for illustrative purposes only. For confirmation of up to date features, you should visit the website.


When to use a savings account?

The above table shows the difference between types of savings accounts. If you want to protect yourself from paying tax on any interest income, then an ISA may be your best choice. But if you want to frequently add and withdraw money, a general savings account may better suit your needs.

The period of time you plan to keep money tucked away will also impact the type of savings account that makes the most sense for you.

If you’re saving for the short term and plan to frequently add or remove funds, a savings account could make better sense. 

But if you want that money to gain interest, and you plan to keep it tucked away for a while, an ISA will help you do that while skipping the tax bill too.

Read more:

 

When to use an ISA account?

Remember, if you’re saving a larger amount and have a longer-term horizon, an ISA will protect you from ever paying tax on interest earned.

But if you have a small amount to save with a shorter-term outlook, maybe a savings account is up your alley. The other reason is that if you are investing a relatively smaller sum, it’s unlikely the interest earned would exceed your PSA.

 

Cash ISA or individual savings account?

As soon as you hear talk of an ‘individual savings account’, just think ISA.

A cash ISA is just one of the four types of ISA. 

We outlined the four types of ISA earlier in the article, but we’ll now add a bit of colour to another popular individual savings account: the stocks and shares ISA.

 

Stocks and shares ISA or savings account?

As much as cash may try to convince you otherwise, it isn’t always king.

If you’re looking to grow your savings and beat inflation, cash is unlikely the answer. 

Your individual circumstances and financial goals will be the biggest factor to consider if you’re debating between a stocks and shares ISA or savings account.

When you invest in stocks and shares, you’re putting your money to work. This is why your long-term return with a stocks and shares ISA could be higher than with a cash ISA. 

This is the first way a stocks and shares ISA differs from a cash ISA.

Though, depending on how you choose to invest, it will probably carry greater risk than a cash ISA. 

That’s because you’re investing in the stock market, which means your return could go down or up. There’s a risk that you lose all of the capital that you invest - which would be much less likely in the case of a cash ISA.

Both the cash ISA and stocks and shares ISA will protect you from owing tax.

With a stocks and shares ISA, you won’t pay tax on any investment gains. That means no income tax on dividends or interest earned. You also won’t pay capital gains tax if you sell your investments for a profit. Again, you wouldn’t pay cash on interest income from a cash ISA - but capital gains tax and tax from dividends wouldn’t be relevant in that account.

Your Freetrade stocks and shares ISA gives you access to US and UK stocks, ETFs, REIT stocks and investment trusts - just to name a few. So there are plenty of opportunities to diversify your portfolio and scale down or up the risk, as you please.

 

FAQs

Is a savings account the same as an ISA?

Technically, no. But we appreciate there are a ton of names flying around. 

As we said above, an individual savings account is an ISA. This is different from your everyday savings account in a few ways, but most notably, because you won’t pay tax on interest earned in your cash ISA account.

In short, a savings account could be an ISA - but it also might just be a regular savings account. Not all savings accounts are ISAs, and not all ISAs are savings accounts.

A trick if you’re trying to distinguish between the two is to just ask yourself, am I sheltered from paying tax on interest in this account? And is there a £20,000 deposit limit?

If that’s a double head-nod, then you’re looking at an ISA.

 

Can I have an ISA and a savings account?

You can absolutely have both a savings account and an ISA. So if you wanted to tuck away some money for easy access, you could do so with a savings account. At the same time, you could have a larger amount of money saved up in your ISA, so any interest you earn on your savings is tax-free. 

So, in conclusion, should I open an ISA or a savings account?

As tends to be the way with life, there’s no hard and fast rule to answer this one.

But there are a few questions you can ask yourself which might help guide the way.

Let’s say you have some cash on hand and you’re trying to decide what to do with it. If you’ve already decided you’d like to save the money rather than invest it, you can choose either a typical savings account, or an ISA.

Then you need to think about tax treatments - just what the tax doctor ordered. 

If you want to protect any interest payments from owing tax, then an ISA can help here. Bear in mind you might already fall below the threshold of having to pay tax on these interest payments anyhow. Remember our handy table up at the top of the page?

Depending on your relationship with paperwork, the task of completing a self-assessment tax return might make the general savings account more daunting. With an ISA, you don’t have to worry about that.

Many wouldn’t have to pay tax on interest from a savings account, because of their PSA. And with the Bank of England (BoE) reporting interest rates at “new historically low levels” you would need to save a lot to earn enough interest to exceed the £1,000 limit for a basic taxpayer. 

Will I go over my Personal Savings Allowance?

For instance, if you were earning 1% interest on your savings account, you would need to have £100,000 deposited to earn £1,000 in savings interest.

Still, it’s worth double-checking how your savings measure up to your PSA. And if you have a lot of cash in savings, an ISA will guarantee you steer clear of ever paying tax on interest.

It’s also important to consider the interest rate on a cash ISA compared to a normal savings account. How do they measure up? This rate will differ depending on the ISA or savings account provider too, so it’s a great time to get your research cap on to make sure you’re likely to hit your savings goals.

Don’t forget that it doesn’t actually have to be a choice. You can open an ISA and an everyday savings account if you’d like.

If you do decide to open an ISA, remember that the deadline is midnight on the 5th April 2023. 

You won’t turn into a pumpkin, Cinderella-style, if you miss it. But you won’t be able to take advantage of this year’s £20,000 ISA allowance. This is important to keep in mind because you can’t carry forward any unused ISA allowances. If you don’t use it, you’ll lose it.

 

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Important information on SIPPs

SIPPs are a pension product designed for people who want to make their own investment decisions. You can normally only access the money from age 55 (set to rise to 57 from 6 April 2028).

This article is based on current rules, which can change, and tax relief depends on your personal circumstances. When you invest, your capital is at risk.

The value of your portfolio can go down as well as up and you may get back less than you invest.

Before transferring a pension you should ensure you will not lose valuable guarantees or incur excessive transfer penalties. Pensions are usually transferred as cash so you will be out of the market for a period.

Freetrade does not currently offer drawdown products for our SIPP.

Important information

This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice.

When you invest, your capital is at risk. The value of your portfolio, and any income you receive, can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.

Eligibility to invest into an ISA and the value of tax savings both depend on personal circumstances and all tax rules may change.

Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).

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