Savings Accounts vs ISAs – what’s the difference?

It feels like only yesterday we were wishing each other Happy New Year, but it’s not long now until we wish you Happy New Tax Year instead! The UK tax year runs from the 6^th April each year, so it’s fast approaching. That means you’ll want to think about how it can affect your savings.

ISAs and savings accounts work in numerous ways and benefit savers differently. Whether you’re new to savings or have been saving for a while, you might still question what savings account is best for me and could I benefit from an Individual Savings Account (ISA).

So, what’s the difference?

Savings accounts have always been a popular way to save your money whilst benefiting from interest at the same time, whereas ISAs are essentially a tax-free way to save. There are different types of savings accounts available depending on your personal goals and needs.

• Easy Access Accounts are one of the most popular savings options as they’re perfect for the everyday saver. You can benefit from accruing interest on your savings, with the freedom to deposit and withdraw your money whenever you want.
• In contrast, Bonds, Notice and Limited Access Accounts mean locking your money away for a particular fixed period. They typically give you a higher interest rate, but it’s only a great option if you know you won’t need access to your money.

All savings accounts will come with a Personal Savings Allowance (PSA), which means you’ll accrue a certain amount of interest before you need to pay tax on it. This depends on your tax band as basic, higher, additional rate and non-taxpayers have a different allowance, ranging from £5,000 to £0.

A few years ago, when interest rates were lower, a lot of people may not have reached their PSA. However, as interest rates have steadily increased over the last year or so, more and more people may find they exceed their PSA.

This is when ISAs could come in handy!

In contrast, ISAs benefit from £20,000 tax-free interest each tax year. But, just like savings accounts, there are different types of ISAs that have different benefits depending on the saver.

• Cash ISAs are a popular option as money can be tucked away safely and benefit from tax-free, high interest rates. They’ve been the most popular ISA for over a decade compared to any other type. There are fixed rate options, and you can even get an Easy Access ISA, so you don’t necessarily need to lock your money away, with no access. They give savers an excellent way to make more out of your savings but still give you flexibility and freedom to save in the best way to suit you.
• Stocks and Shares ISAs have the potential to provide you with a higher interest rate, but your savings aren’t held by a bank, but instead it’s invested, so do come with more risk. Innovative Finance ISAs are similar, however, they’re centred around peer-to-peer lending, so an even higher risk. If you’re prepared to take the risk for the potential gains, these could be a good choice.
• Junior ISAs can be opened on behalf of anyone under the age of 18 and the options are Junior Cash and Junior Stocks and Shares ISAs. These have similar rules to their adult counterparts but only have a limit of £9,000.
• Lifetime ISAs good for anyone saving for their first house or for their retirement, as you can only withdraw from these if it’s for the purchase of your first house or if you’re over 60. These have a limit of £4,000 per tax year and the government will contribute an extra 25%. So, for every £4 you save, they give you £1.

When subscribing to an ISA, it’s important to note that there are certain rules that you need to follow, and some new changes that could be coming into effect in the new tax 2024/2025 tax year will help make ISAs more flexible than ever.

In the past every tax year, savers could put money into one of each type of ISA but there are changes being introduced that may give more flexibility for savers around where they hold their ISA accounts and how many they're allowed to subscribe to each tax year.

It’s worth remembering that not all providers need to follow these new rules. If a provider does, however, it’ll mean that, for example, not only would a saver be able to hold multiple Cash ISAs but also able to open them across different providers. It’ll give savers more tax-free freedom to save their money in even more ways that suit them.

So, which is best?

This is completely down to the individual saver, their goals and motives behind tucking their money away. The first thing to decide when thinking about opening either an ISA or a savings account should be, why you’re saving, how often you’ll need to access your money and how much you’re prepared to put away.

After you’ve thought about these, a couple of other factors to consider will be your personal tax position and how happy you are taking risks as these come into play for certain ISAs and savings accounts.

If you’re not sure what kind of saver you are, why not take our Saver Quiz to figure it out!

It’s all about making informed decisions and choosing the best option for you, so hopefully we’ve cleared some things up around ISAs and savings accounts.

If you’ve got any more questions, or wish to discuss our options, why not give your local branch a call or simply pop in and have a chat.

1. Commentary for Annual savings statistics: June 2023 - GOV.UK (www.gov.uk)