Cash ISAs vs savings accounts: Key differences explained

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 to 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 our guide to find out more about the differences between ISAs and savings accounts to help you understand which could be the most suitable option for your financial situation and 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 or Capital Gains 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 may be 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 across 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.

Since 6 April 2024, you have been able to 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, 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 between ISAs, 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).

Moreover, Junior ISAs allow parents and guardians to save up to £9,000 each year for their child without paying tax on the interest earned. See more on the ways you can save for your child.

ISAs vs savings accounts

Deposits in both ISAs and savings accounts are protected under the Financial Services Compensation Scheme (FSCS). Bear in mind that only up to £85,000 you have saved across all your accounts with each provider (or multiple providers that share a banking licence) is protected by the FSCS.

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.

Moreover, if you’ve maxed out your annual ISA allowance for a tax-year, you may have no option but to put your money in a standard savings account as well as an ISA.

You can also have more than one savings account, such as an easy access account and a fixed rate bond, alongside one or more ISAs. For example, you could choose to split your annual £20,000 allowance between an easy access ISA and a fixed rate ISA, with any other money in standard savings accounts. This combination would allow you to access some money in an emergency while the rest is locked away and providing you with a guaranteed return, with the additional benefit that the ISA interest you earn is exempt from income tax.

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 interest.

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 at a higher level than they have been for several years, more people could find the interest they earn is more than their PSA. Because of this, many savers could find it useful to save into an ISA instead of, or in addition to, a savings account.

Are savings accounts better than ISAs for short-term savings goals?

Easy access savings accounts and easy access ISAs could both help you save towards your short-term savings goals as you can typically deposit into the accounts without restriction.

However, if you want the option to dip in and out of your savings, an easy access savings account could be more suitable for you as they allow you to do this without penalty (unless the provider sets its own limits).

By contrast, deposits in and withdrawals from an ISA could affect your annual allowance, unless your account follows flexible rules. Find out more in our guide to flexible ISAs.