When it comes to planning ahead and saving for the future, it can be difficult to know whether an Individual Savings Account (ISA) or a traditional savings account is the better choice. Both accounts offer a way to save money and grow it over time, but they work in different ways.
What is the difference between an ISA and a savings account?
The key difference between an ISA and a savings account is that ISAs are designed for tax-free growth. This means that you don't pay UK income tax or capital gains tax on the interest you earn within an ISA.
Understanding the key differences between savings and ISAs can help you make an informed decision based on your personal financial goals.
What is an ISA?
An ISA (Individual Savings Account) is a tax-efficient way of saving or investing your money. The key benefit of an ISA is that any interest, dividends, or capital gains you earn are free from income tax and capital gains tax, meaning you keep more of your returns. Each tax year, you can contribute up to £20,000 across all of your ISAs, making them a powerful tool for both saving and investing.
Learn more about the different types of ISAs, including how they work and their key benefits.
There are five different types of ISA:
- Stocks and shares ISA – a way to hold shares, funds, bonds and many other assets in an ISA
- Junior ISA – an ISA that parents or guardians can open to help them save for their children
- Lifetime ISA – a specific ISA designed for saving towards your first home or retirement, topped up with a government bonus
- Cash ISA – an ISA that can only hold cash
- Innovative Finance ISA – a niche ISA product designed for peer-to-peer lending platforms
While the maximum ISA allowance for adults is £20,000, the Lifetime ISA and Junior ISA have their own ISA rules and allowances.
What is a savings account?
A savings account is simpler way of saving, and one that is more familiar to the majority of the population, but it comes without the tax advantages offered by ISAs. Savings accounts work by earning interest on the balance in your account. Savings accounts can be easy access, notice, or fixed term.
- Easy access savings account – money can be withdrawn at any time without penalties. The interest rate on these accounts usually is variable, meaning they can be changed by the provider.
- Fixed-term savings account – these accounts let you put money away for a specified period of time, over which a fixed rate of interest is earnt. This is beneficial for money you don’t need access to, and when you want to know exactly how much interest you will earn. However, there may be restrictions or penalties on accessing your money before the end of the term.
- Notice savings account – this type of account usually offers higher interest rates, but there are restrictions on how you access your money. For instance, there may be limited yearly withdrawals.
Unlike ISAs, there’s no annual limit to how much money you can put into savings accounts.
Although you don’t get the tax wrapper offered by ISAs, basic-rate taxpayers can use their personal savings allowance which allows them to earn up to £1,000 a year in interest without paying tax. For higher rate taxpayers, this allowance is £500, while additional rate taxpayers don’t receive an allowance.
At AJ Bell, we bring together savings accounts from many different providers to save you the hassle. Head to our Cash savings hub to see what rates are available today.
Differences between savings account and ISA
Here at AJ Bell, we offer Stocks and shares ISAs, Junior ISAs and Lifetime ISAs. We also give you access to competitive savings accounts from a range of banks. Learn more about the differences between savings and ISAs.
Stocks and shares ISA | Cash ISA | Lifetime ISA | Savings account | |
|---|---|---|---|---|
| Tax benefits | Tax-free on income and capital gains | Tax-free on interest | Tax-free on interest and government bonus (25%) | Interest may be tax-free up to personal savings allowance |
| Annual limit | Up to £20,000 annually (across all ISAs) | Up to £20,000 annually (across all ISAs) | £4,000 annually (counts toward £20,000 ISA limit) | No set contribution limit (varies by account type) |
| Eligibility | Anyone aged 18+ | Anyone aged 18+ | Must be aged 18–39 to open; can contribute until age 50 | Anyone aged 16+ (for adult accounts) |
| Withdrawal conditions | Can withdraw anytime (may affect investment growth) | Can withdraw anytime (unless fixed term) | Can withdraw for a first home (house up to £450,000) or after age 60 | Can withdraw anytime (unless fixed term or notice accounts) |
| Government bonus | None | None | 25% bonus on contributions (up to £1,000 per year) | None |
| Interest/return potential | Higher potential return, but with investment risk | Low risk, low return (fixed or variable) | Return depends on the investments and government bonus | Low return (depends on interest rate) |
| Risk level | High (due to market fluctuations, but depends on investment choice) | Very low (secure and guaranteed) | Moderate (depends on investment choice, but includes government bonus) | Very low (secure, unless fixed term) |
| Lock-in period | No lock-in period (but long-term is recommended) | No lock-in period (unless fixed term) | Funds must be held until first home purchase or age 60 | No lock-in period (unless fixed term) |
| Best for | Long-term growth, retirement, or wealth building | Short-term savings or emergency funds | Saving for a first home or retirement | Short-term savings or liquid funds |
| Open an ISA | Open a LISA | Browse accounts |
Is an ISA better than a savings account?
This depends on your individual situation, savings goals, timescale, and knowing the difference between saving and investing.
If you’re saving for retirement or a home purchase, a Lifetime ISA is ideal due to its tax advantages and potential for higher returns.
If you want regular access to your money, or will need it in within three years, a savings account may be more appropriate as it offers liquidity and security.
Can I have both an ISA and a savings account?
Yes, you can. This is not a choice of one or the other and in most cases, it will make sense to divide your money between them. Just remember the annual limits that apply to ISAs, and the personal savings allowance that applies to savings accounts.
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Disclaimer: The value of investments can go down as well as up and you may get back less than you originally invested. Past performance is not a guide to future performance and some investments need to be held for the long term. Tax treatment depends on your individual circumstances and rules may change. ISA rules apply. These articles are for information purposes only and are not a personal recommendation or advice.