Cash ISA or Savings Account: Which Should I Choose?

If you have money to put into savings, it’s easy to get overwhelmed by the number of options available.

One of the main questions to consider is whether you should save into a traditional savings account or a cash Individual Savings Account (ISA).

There are some key differences between savings accounts and ISAs, with each type of account offering different advantages and disadvantages.

Read on to find out more about the key features of ISAs and savings accounts to help you understand which could be the most suitable option for your financial situation and savings goals.

What’s the difference between ISAs and savings accounts?

While ISAs and savings accounts are both places where you can deposit your money, there are some key differences between them.

Tax

Unlike savings accounts, any money held in an ISA is exempt from tax. This means you don’t need to pay income tax on any interest or investment growth you earn from money held in any type of ISA.

By contrast, the interest you earn on money deposited in a savings account is subject to tax. You can earn up to £1,000 (basic rate taxpayers) or £500 (higher rate taxpayers) in interest without paying tax, thanks to your Personal Savings Allowance (PSA). However, you need to pay tax on any interest you earn above these thresholds. Additional rate taxpayers don’t have a PSA.

Deposit limits

You can only save up to £20,000 in ISAs every tax-year. This limit applies to all ISAs, so you couldn’t save £20,000 in a cash ISA and £20,000 in a stocks & shares ISA, for example. You would need to split the allowance between the accounts.

From 6 April 2024, you can open and pay into multiple cash ISAs in the same tax-year, as long as you don’t exceed your £20,000 allowance across all your accounts. For example, you could save £10,000 in one cash ISA and £10,000 in a different cash ISA. This rule change doesn't apply to Lifetime ISAs or Junior cash ISAs.

In contrast to ISAs, there’s no limit on the amount you can deposit in savings accounts. You can deposit as much as you like in one or more savings accounts, although you should be aware that individual providers may set their own minimum and maximum limits.

Withdrawal rules

There are no universal rules or limits on withdrawing money from an easy access savings account, although some providers may set their own individual restrictions.

However, there are certain points to consider if you want to withdraw from an easy access ISA. While a so-called “flexible” ISA allows you to withdraw and replace money without affecting your annual ISA allowance, other ISAs don’t offer this flexibility. This means that any deposit into the ISA will count towards your ISA allowance, even if you’re replacing money you’ve previously withdrawn from the account.

Whether you save into a fixed bond or fixed ISA, providers may not allow you to access your money until the end of the term. If you can withdraw your money earlier, this is likely to come with a penalty.

Transfer rules

If you want to move money from one ISA to a different ISA, you need to follow the ISA transfer process. If you withdraw the money yourself and deposit it into a new ISA, this will use your ISA allowance and could affect your tax-free benefits.

By contrast, you can switch savings accounts simply by withdrawing money from one account and putting it into a new one.

Joint accounts

ISAs don’t allow joint applications, which means you can only open and hold an ISA individually. By contrast, it’s possible to have a joint savings account.

However, not all savings providers allow joint applications and those that do may set certain criteria, so it’s worth checking the terms of the account if you want to manage it jointly.

Types of accounts

While you can get easy access, fixed and notice cash ISAs and savings accounts, there are some specialist types of ISA that work differently to savings accounts.

For example, there are stocks and shares ISAs that allow you to invest your savings, as well as Lifetime ISAs that offer a 25% bonus on your savings from the Government (up to a maximum of £1,000 per year).

ISAs vs savings accounts

Can you have an ISA and a savings account?

It’s possible to have both an ISA and a savings account. There are no rules to stop you having both types of account, so it’s up to you whether you save in an ISA, a savings account or both.

For example, you may choose to put some money into a savings account that pays a higher rate of interest, as well as into an ISA to benefit from your tax-free allowance.

You can also have more than one savings account, such as an easy access account and a fixed rate bond, alongside an ISA.

And, from 6 April 2024, you can save into more than one cash ISA, so you could choose to split your allowance between an easy access ISA and a fixed-rate ISA, for example.

Should I open an ISA or a savings account?

Ultimately, the question of whether you should open an ISA, a savings account or a combination of both will depend on your individual situation. Some factors to consider when making your decision include:

• the amount of money you want to save
• if you’re at risk of being taxed on the interest you could earn on your savings
• whether you want to save money for the short-term or long-term
• how often you want to access your savings.

Savings accounts may offer a higher rate of interest than ISAs, so these could be worth considering if the amount you would earn on interest doesn’t go over your Personal Savings Allowance (PSA).

If you’re likely to earn more interest than your PSA, either now or in the next few years, putting your money into an ISA could be beneficial so you avoid paying tax on your savings.

When interest rates were low, ISAs were less useful as most people didn’t earn enough to be taxed on their savings interest.

But with interest rates on savings accounts so much higher than they have been for several years, more people could find the interest they earn is more than their PSA. Because of this, more savers could find it useful to save into an ISA instead of, or in addition to, a savings account.

It’s also worth thinking about whether you want to have access to your savings. Easy access savings accounts allow you to dip in and out of your savings without penalty (unless the provider sets its own limits) which can make them a handy place to keep an emergency savings fund, for example.

However, not all easy access ISAs will operate in the same way, as “non-flexible” ISAs will count any deposits towards your annual ISA allowance, even if you’re replacing money that you’ve previously withdrawn.

You can compare ISAs and savings accounts on our charts to help you find an option that suits your financial circumstances and savings goals.