What is a savings account?

Saving money is a great way to prepare for the future. Setting aside a pot of money can give you security in case of unexpected expenses or the flexibility to make a large purchase without impacting your normal monthly outgoings. However, storing that money under a mattress or in a piggy bank isn’t the safest option – it’s better and safer to find somewhere that can look after your savings for you – plus they’ll pay you some interest for the privilege. These savings providers offer a range of different savings accounts, with different features to suit a variety of needs. ISAs are one of the better-known savings accounts that you can use to help you reach your savings goals. Below we compare ISAs with other savings accounts, to help you decide which saving account could be most suitable.

What's the difference between ISAs and other savings accounts?

Non ISA savings accounts can come in many different forms – instant or easy access, notice account, regular saver or fixed rate bond. They offer a range of different interest rates, terms and conditions, so you can choose one to suit your financial needs. 

The key difference between these and an ISA is that ISAs pay interest that is tax-free – apart from sticking to ISA annual and total ISA account limits that we'll detail further on, you just earn the interest and think no more about it.

With non-ISA savings accounts however you can only earn so much interest before having to pay some back to the tax man. The amount you can earn is defined by your Personal Savings Allowance (PSA). And your PSA is based on your income tax bracket and if you earn over this threshold of interest it is down to you to declare it to HMRC. For example, a Basic-Rate Taxpayer can earn interest of £1,000 tax-free, and a Higher-Rate Taxpayer can earn £500. You can find out more about income tax rates and bands here. You can also have and pay into multiple savings accounts during the tax year.

What is an ISA?

An ISA is a savings account where you don’t pay tax on the interest you earn and it isn't affected by the Personal Savings Allowance that we mentioned above but, you are subject to annual limitations. There are different types of ISAs, which is short for individual savings account - Cash ISAs, the Lifetime ISA, and Stocks & Shares ISAs. For the current tax year the allowance is £20,000 combined across all the ISAs that you have. You can’t save more than the annual £20,000 ISA allowance across all types of ISAs per tax year and the maximum Lifetime ISA deposit of £4,000 is included within this £20,000. The tax year runs from 6th April to the following 5th April.
  • You can only open a single account of any one type of ISA per tax year. For example, you can open a Cash ISA and a Lifetime ISA in the same year but you cannot open two Cash ISAs. 
  • Providing you only pay into one of each type of ISA each year you can start ISAs with different providers each tax year. 

Is a savings account the same as an ISA? 

Although an ISA is a type of savings account, they differ to other savings accounts in the following principle ways: 

  • Tax treatment: with a savings account you’ll pay tax on interest earned over your Personal Savings Allowance, any interest earned on an ISA is completely tax-free. 
  • Deposit limits: there may be deposit limits on savings accounts. You may be able to deposit as many times as you like until you hit the threshold of the account, although some accounts may have restrictions on the number of deposits or only allow a single lump sum deposit. It’s always best to check the type account matches your requirements. Deposits into ISAs are capped at £20,000 for the current tax year. 

Why would you choose an ISA?

An ISA could be a good option for someone who has a long-term savings plan, giving them the opportunity to grow their savings completely tax-free. Some ISAs such as Fixed ISAs have a fixed term and may not allow access and those which may apply a penalty for early access, so it’s worth reading the terms and conditions carefully. Easy Access ISAs will usually let you access your money without penalty but again, it’s best to check the Ts & Cs. 

Why would you choose a savings account?

There are a variety of savings account types available, meaning you can choose the one that matches your saving style and your financial goal. 

Are ISAs better than a savings account?

This depends on your individual circumstances, and ultimately, what your financial goal is. ISAs and savings accounts each have their own interest rates, terms, and conditions. Take a look at our range of ISAs and savings accounts, to see if one could work for you. 

Can I have an ISA and a savings account?

Yes, you can have an ISA and savings account(s) and pay into both during the tax year. It’s important to remember that while you can pay as much as you wish across multiple savings accounts per tax year, subject to the terms of the account, you can only pay up to £20,000 into ISAs per tax year, for example £4,000 into a Lifetime ISA and the remaining £16,000 into a Cash ISA. 

Should I open an ISA or a savings account?

The type of account you choose to open is dependent on your individual financial situation and what you’re saving for, for example a Lifetime ISA is specifically for retirement and first home savings. As there are different types of both ISAs and savings accounts, take time to explore the different options available, to see which may suit you best. 

Consider factors such as if you have a lump sum to deposit, whether you receive interest above the Personal Savings Allowance, how much you can afford to set aside regularly, if you’re likely to need access to your money in the short term or if you can afford to lock it away, and what your overall savings goal is. Once you have an idea of what your savings plan could look like, take a look at our range of ISAs and savings accounts, to find one to suit your financial needs.

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