ISAs vs Savings Accounts

ISAs vs other savings accounts – Which should you choose?

When choosing how to save your money, it’s important to pick the right option for you.

You should consider how long you want to invest or save for, and the levels of risk you’re happy to take. Saving tends to be for the short term, while investing is for longer term (5+ years). This is because investments can fall as well as rise in value so you could get back less than you invest. Cash gives you guaranteed returns, but please remember that inflation reduces the spending power of your money.

Here we explore how ISAs and other savings accounts work, and how to decide which is right for you.

What is an ISA?

An ISA is an Individual Savings Account and can be used to save money either as cash or by investing it. Cash-based ISAs pay interest on the account. Investment-based ISAs are reliant on the potential returns of the items you invest in.

ISAs are a tax-efficient way to save and invest as the government doesn’t charge any UK income tax on the interest or any income you may earn in the ISA, nor any capital gains tax on investment growth.

There are five types of ISA:

• Cash ISAs are savings accounts which pay a rate of interest on your cash. The rate of interest earned will generally depend on your chosen provider and how long you’re willing to save for and the access you’d like to your savings.
• Stocks and Shares ISAs let you hold shares, funds, and other types of investments in order to benefit from the potential returns as their values rise and fall.
• Lifetime ISAs, which are generally for saving for your first home and/or for later life. They can be used to hold cash, shares, funds, and other investments – but you can only open one if you’re between 18 and 39 years old.
• Innovative Finance ISAs for investments such as peer-to-peer lending.
• Junior Cash ISAs or Junior Stocks and Shares ISAs, which you can invest in on behalf of a child. Withdrawals aren’t usually allowed until they turn 18.

The tax year runs from 6 April to 5 April. For the 2024/25 tax year you can pay up to £20,000 into adult ISAs. This is called the ISA allowance and it can be split between four different types of ISA – Cash ISAs, Stocks and Shares ISAs, Lifetime ISAs (up to £4,000 per tax year) and Innovative Finance ISAs. You can split your ISA allowance across the different types of ISA in whatever way suits you. If your child is eligible, you can also pay up to £9,000 per year into a Junior ISA which won’t count towards your own ISA allowance.

For Lifetime ISAs, you can contribute up to £4,000 each tax year and the government will add a further 25%. So for every £4 you save, you get £1 extra - up to £1,000 per tax year. If you want to take money out before you're 60 and are not buying your first home, there's usually a 25% government charge. That means you could get back less than you originally put in.

ISA and tax rules can change and the value of any benefits depends on your circumstances.

Learn more about ISAs

What is a savings account?

Savings accounts offer different interest rates depending on how long you’re willing to put your money away for. Accounts can range in duration from as little as 3 months to 5 years between instant, easy access and fixed term accounts. Usually, the longer you commit to a savings account, the higher the rate available.

The following accounts are often available through Active Savings. Please note, products are added or withdrawn all the time.

• Fixed rate bonds - Fixed rate bonds (also known as “fixed term savings accounts”) typically offer a higher, fixed interest rate for setting your money aside for a set period.
• Easy or instant access savings. These accounts pay a variable rate and are a way to earn interest on your cash savings without having to lock them away for a set period of time. They appeal to short-term savers and those building an emergency cash fund. You can add to your savings at any time. Easy access account withdrawals usually take up to 1 working day.
• Limited access savings accounts - With limited access products you can withdraw your money when you like, but only a certain number of times a year without incurring a charge. If you don’t need to access your savings very often, limited access accounts may offer a higher variable interest rate compared to easy access.

While a Cash ISA is also a savings account, thanks to its classification as an ISA it benefits from tax sheltering compared to standard savings accounts.

While savings accounts aren’t inherently free from tax, most people can earn some interest from their savings without paying tax. Any interest you earn from savings will be tax free if it falls within your Personal Allowance starting rate for savings or Personal Savings Allowance (PSA).

The Personal Savings Allowance for non-taxpayers and basic rate taxpayers is £1,000. This drops to £500 for higher rate taxpayers – and additional rate taxpayers don’t get any PSA at all.

If the total of your other income, such as wages or pension, is less than £17,570 you may also earn up to £5,000 in interest without paying tax on it. This is your starting rate for savings. Every £1 of non-savings, non-dividend income above your Personal Allowance reduces your starting rate for savings by £1.

Please note, the PSA for Scottish taxpayers is based on the rest of the UK tax bands.

Savings accounts basics

Should I choose an ISA or a savings account?

When deciding the right approach for your savings, you should consider:

• How long you want to put your money away for
• Your tax position and the allowances available to you
• How much you want to save or invest
• Your appetite for risk

You can pay into different types of ISAs and savings accounts in the same tax year.

Generally, if you need to access the money within five years, Cash ISAs and other savings accounts could be considered. If you don’t need the money for five years or more and are happy with the risks of investing, you might want to look into an investment-based ISA.

Should I save or invest?

Deciding between a Cash ISA or a savings account?

When deciding whether to save into a savings account or Cash ISA, amongst other things consider your tax position and the allowances available to you.

When interest rates are high outside of an ISA, you’re more likely to exceed your Personal Savings Allowance. This means you could pay more tax on your savings.

A Cash ISA lets you keep earning interest without paying more tax than you need to. Compare our latest Cash ISA and Active Savings offers and switch your money on. With HL you can open an account in minutes.

Learn more about HL's Cash ISA

Learn more about Active Savings

Compare the latest savings accounts rates

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