ISAs have been protecting our money from tax for more than 20 years now. But with rising interest rates, traditional savings accounts can still look attractive. Here we explain the differences between the two.
What is an ISA?
Individual savings accounts (ISAs) allow you to save a set amount each year to grow tax-free for as long as it remains in the account. The amount you can save in an ISA is called your ISA allowance, and it currently stands at £20,000 a year for 2023/24.
There is a whole range of ISA types, including cash ISAs, stocks and shares ISAs, lifetime ISAs, innovative finance ISAs and junior ISAs.
Cash ISAs are very similar to traditional savings accounts. You get a variety of cash ISAs in the same way you get lots of different savings accounts. Types of cash ISAs include:
- Instant access cash ISAs
- Notice cash ISAs
- Regular savings cash ISAs
- Fixed-rate cash ISAs
The easiest way to think of a cash ISA is to imagine it as a wrapper around a savings account protecting it from tax.
What’s the difference between ISAs and savings accounts?
There are a number of differences between ISAs and ordinary savings accounts.
The key difference between an ISA and a savings account is the tax you pay on your returns. When you earn interest on your savings it is liable for income tax. Basic-rate taxpayers can earn up to £1,000 interest a year before income tax is due, and higher rate taxpayers can earn up to £500. This is known as the personal savings allowance. If you earn more interest than that, it will be taxed.
In contrast, ISAs are completely tax-free regardless of how much interest you earn.
2. Deposit limits
You can put as much money as you like into a savings account, unless there is a limit imposed by the bank or building society.
In contrast, you have an ISA allowance that limits how much you can pay into ISAs each tax year. It is currently £20,000.
3. Account limits
You can only open one cash ISA each tax year, but you can open as many savings accounts as you like.
Should I open an ISA or an ordinary savings account?
The answer to this really comes down to how much money you want to save and how long you plan to save it.
If you are saving small amounts for a short-term goal, then a savings account will likely be the better option as it’s unlikely that you will exceed the personal savings allowance.
Anyone who is looking for a home for a large amount of money, though, should consider an ISA. With an ISA you never have to worry about your interest exceeding the personal savings allowance. It will always be tax-free.
Similarly, if you are saving for a long-term goal, then putting your money into an ISA means it remains sheltered from tax as it grows.
WARNING: We cannot tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk and you may get back less than you originally paid in.
QROPS Explained: Transferring a Pension Overseas
A qualifying recognised overseas pension scheme – or QROPS – is a pension scheme based in another country that might prove a suitable destination if you wanted to transfer your UK pension scheme abroad. You should definitely consider getting advice before making a QROPS transfer.
Guaranteed Minimum Pension Explained – What is GMP?
You might have a guaranteed minimum pension if you were a member of a contracted out final salary scheme before April 1997. A GMP pension should pay a level of income that is at least comparable with how much you would have received if you had been contracted into SERPS.