ISA vs Savings: Which is best for you? 

8 min Read Published: 09 Apr 2024


One in six adults in the UK, or more than 8 million people, have no savings at all in 2024. A quarter of the adult population has less than £200 in savings currently. So if you're starting to build your savings for the first time, you're in good company. Whether you have a specific goal in mind or just want to build your emergency fund, there are lots of choices out there to help you make the most of your money. Let's take a look at savings accounts and ISAs to see which option works best for you.

What are the differences between an ISA and a savings account?

The key difference between an ISA and a savings account is the tax efficiency associated with an ISA. ISAs allow you to save or invest up to £20,000 per year and you won't have to pay any tax on the interest or growth. With savings accounts, there are no limits to how much you can save (although providers may set their own limits), however, any interest you earn may be taxable, depending on your personal savings allowance. We explain how the personal savings allowance works in more detail below.

Savings accounts typically offer a fixed or variable interest rate. Your capital isn't at risk but there is limited scope for growth. There is a lot more variety with ISAs. While Cash ISAs are similar to ordinary savings accounts, there are many other types of ISAs to suit your risk level. ISAs can be a good choice for people who want to invest in stocks and shares and protect their investments from tax as well. With Innovative Finance ISAs, there is an opportunity to partake in peer-to-peer lending and make significant gains; although this is often a high risk undertaking.

Below, we've summed up the key differences between Stocks and Shares ISAs, Cash ISAs, and savings accounts.

Stocks and Shares ISAs  Cash ISAs  Savings Accounts 
Max deposits per year £20,000 £20,000 Depends on provider
Stocks tick cross cross
ETFs tick cross cross
Bonds tick cross cross
Cash tick tick tick
Tax-free interest/growth tick tick cross
Risk-free (Capital not at risk) cross tick tick

What is a savings account and how does it work?

Savings accounts come in all shapes and sizes and are designed to help you save money. Hikes in the base rate in the past couple of years mean that savings accounts now offer competitive interest rates when compared to other types of investment products.

Saving works differently depending on the savings account you choose. Some accounts require you to put in a lump sum at the start and leave it there for a fixed period to earn interest. Others allow you to put away a little each month and build your savings that way. Here are a few savings account options you might want to explore:

  • Instant access savings accounts - These accounts allow you to access your money whenever you want and can often come with attractive interest rates. They can be slightly different to easy access savings accounts that come with more restrictions. Find out more about instant access savings accounts here.
  • Limited access savings accounts - These accounts typically come with higher interest rates than instant access savings accounts but only allow limited withdrawals during a specific period. Find out more about limited access savings accounts in our article on the topic.
  • Regular savings accounts - These accounts allow you to build your savings by contributing a little every month. Regular savers can attract some of the highest interest rates on the market, but there are typically limitations in terms of how much you can deposit and how many withdrawals you can make. Find out more about regular savers here.
  • Fixed-rate bonds - Fixed rate savings bonds require you to lock your money away for a specified period of time. You can't usually access your money during this period, but you can benefit from higher interest rates as a result. Find out more about fixed rate bonds here.
  • Notice accounts - Notice savings accounts require you to give notice before accessing your funds. Notice periods generally last between 90 days and 120 days, but there can be other deals on the market too. Check out the best notice accounts on the market right now here.

So, as you can see, there are lots of savings account options out there to suit your circumstances. Whether you want instant access to your money, or to build a savings habit with a regular saver, or even to lock your money away for a few years, there are savings accounts on offer.

Paying tax on your savings interest

Regardless of the type of savings account you choose, you could be liable for tax on the interest you earn. Most people have a personal savings allowance (PSA) of some sort. The exact amount you're entitled to will depend on how much other income you earn. Basic rate taxpayers who earn more than £17,570 can generally earn up to £1,000 in interest tax free every year. Those who earn less than that are entitled to the starting rate savings allowance as well and could earn up to an additional £5,000 in interest tax free.

Higher rate taxpayers, which is those who earn over £50,271, only get a personal savings allowance of £500 per year. And additional rate taxpayers don't get a personal savings allowance at all. You can find out more about paying tax on savings interest here.

So while savings accounts can be a great way to boost your savings, high interest rates nowadays mean that many people could realistically earn more than their personal savings allowance in interest. Fortunately, more tax-efficient alternatives exist.

What is an ISA and how does it work?

ISA stands for Individual Savings Account and it's essentially a tax wrapper that can protect a chunk of your money from income and capital gains tax. You can add up to £20,000 to your ISA every year tax free. If you have children and they have Junior ISAs, you can also contribute up to £9,000 to each child's Junior ISA tax free every year. When we say tax free, we mean that you won't have to pay income tax on the interest you receive from your ISAs. Your investment profits within the ISA are also free from Capital Gains Tax. As such, ISAs can be a tax-efficient way to save for the future.

You can open and pay into multiple ISAs of the same type within the same financial year as April 6, 2024. So, for example, prior to the change, you could only open and pay into a single Cash ISA in the same financial year. Now, you can open multiple Cash ISAs in the same tax year and contribute to them all. Check out our article here for more ISA changes to come in 2024.

There are a few different types of ISAs depending on your needs. These include:

  • Cash ISAs - These accounts work like ordinary savings accounts; you deposit money and get a set interest rate; like savings accounts, they come in all shapes and sizes including easy access, fixed rate, and Halal, for example.
  • Stocks and Shares ISAs - These accounts are essentially tax-free investment accounts where you invest in stocks and shares; your capital is at risk and your funds can go up or down depending on how the market performs. However, Stocks and Shares ISAs can outperform Cash ISAs.
  • Lifetime ISAs - These accounts allow you to save up to £4,000 per year and get a 25% government bonus if you're saving towards your first home or retirement; because it's designed to get you on the housing ladder (or help you save for retirement), there are restrictions as to how and when you can access the funds.
  • Innovative Finance ISAs - These ISAs allow you to invest via peer-to-peer loans where you work as a lender with individuals and businesses. Gains can be high but so is the risk, as you're financing unsecured loans. Unlike most other ISAs, this type of ISA isn't FSCS-protected so you could lose all your money if your provider goes bust.
  • Junior ISAs - These accounts allow you to save for your child by investing up to £9,000 per year tax free in a Junior Cash ISA or Junior Stocks and Shares ISA. However, you can't typically withdraw money from a Junior ISA; the money belongs to your child and they can only withdraw the funds once they turn 18.

ISA types compared

The table below summarizes how the different ISAs work and what limits and restrictions you need to be aware of. If you want to find out more about your ISA options, check out our different types of ISAs explained article.

Cash ISA  Stocks and Shares ISA  Lifetime ISA  Innovative Finance ISA  Junior ISA 
Max deposit per year £20,000 £20,000 £4,000 £20,000 £9,000
Stocks  cross tick tick cross tick
ETFs  cross tick tick cross tick
Bonds  cross tick tick cross tick
Cash  tick tick tick tick tick
Peer-to-peer loans  cross cross cross tick cross
Benefits  A low-risk, tax-free "savings account". Potential for higher tax-free gains than with Cash ISA. The government pays 25% bonus on investments. Potential for significant gains on investments. A tax-efficient way to save for your children's future.
Limitations  Potentially lower gains than with other types of ISAs. Capital at risk; you're investing in stocks. Funds must be used to buy first home or for retirement. Very high risk and not usually FSCS protected. Children can only access the funds once they turn 18.

Can I transfer cash ISAs to Stocks and Shares ISAs?

In general, you can transfer your cash ISA to a Stocks and Shares ISA and vice versa. You can also change providers and transfer a cash ISA to a different cash ISA if, for example, you've found a better deal. However, not all providers accept transfers out or transfers in, so you'll have to read the fine print to make sure you're eligible. If you are, the process is generally fairly straightforward and is largely managed by your provider of choice.

Transfer rules between other types of ISAs, including Lifetime ISAs and Junior ISAs are a bit more complicated due to the restrictions associated with these types of accounts. Check out our article on ISA transfer rules if you're interested in transferring your ISA.

Can you have both an ISA and a savings account?

ISAs and savings accounts are not mutually exclusive. If you want to make use of the personal savings allowance and then stick the remainder of your money in an ISA, you can do that. In theory, as long as you qualify, you could open and contribute to as many savings accounts as you like, as well as one of each ISA type every tax year.

ISA vs Savings: Which is best for your circumstances?

There are lots of different options out there to suit people's individual circumstances. There isn't one right answer, especially in the current climate where both ISAs and savings accounts can offer attractive interest rates. In some cases, ISAs are the obvious choice, while in others, a savings account might make more sense. If you're planning on saving for the long term, a Stocks and Shares ISA might work better so you can benefit from potentially higher gains. But if you know you'll need the money in the next year or two, a Cash ISA or savings account could be better suited to you.

Let's take a look at a couple of other scenarios to illustrate why it's not a one-size-fits-all answer.

Let's say you're a higher-rate taxpayer. You have £20,000 you want to put work in a savings account or a Cash ISA. The best easy access Cash ISAs right now offers an AER of around 5% as do the best easy access savings accounts. For simplicity's sake, let's say the interest rate remains the same for a year and you leave your money in your account for a year. You'd earn about £1,000 in interest in both accounts. However, the money in your Cash ISA is protected by a tax wrapper while the money in your savings account isn't. As a higher-rate taxpayer, your personal savings allowance is set at £500, which means you'd have to pay tax on the remaining amount if you opted for a savings account. With the Cash ISA, you'd owe no tax.

On the other hand, if you're a basic rate taxpayer just starting to build your savings, a regular saver might be a good way to go. You're limited in how much you can put away, but some regular savers come with interest rates of 7% and can help you build a savings habit while keeping you within your personal savings allowance.

Whether you're looking for an ISA or a savings account, we have handy comparison tables that we update weekly to show you the best deals on the market right now. You can compare interest rates across several different types of Cash ISAs and savings accounts.