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Key points
A cash ISA is tax-free, whereas you pay tax on interest in a savings account.
Your £20,000 annual tax allowance can be split across different types of ISAs, while there is no limit to the amount of money you can put in a savings account.
There are several considerations when choosing between a cash ISA and a savings account, but it ultimately depends on your own personal situation and goals.
Important: This article is for general guidance purposes only and should not be considered as financial advice. Tax treatment will depend on your individual circumstances and could potentially change in the future.
Firstly, it’s important to understand your personal savings allowance, which is the amount of interest you can earn in a normal savings account before you’re taxed.
If you’re a basic tax rate payer, then it’ll be £1,000, while if you’re a higher rate payer, it’ll be £500. If you’re an additional rate payer, earning over £125,140 as of the 2024/25 tax year, then you don’t have an allowance.
Even if you don’t have enough savings to go over your personal savings allowance, opening a cash ISA could be tax-efficient. This is because your allowance resets every year, enabling you to build yourself a tax-free nest egg. Learn more about the personal savings allowance.
After a year of sitting at a 15-year high of 5.25%, the Bank of England’s (BoE) base rate is starting to fall. Should you put your hard-earned money in a cash ISA or a savings account? What’s the difference between the two? Here’s a handy table with a quick summary of what you need to know.
Questions | Cash ISA | Savings account |
|---|---|---|
What tax do I pay? | None - you can put a maximum of £20,000, and any interest earned is tax-free. | Your personal savings allowance allows you to earn up to £1,000 interest tax-free if you are a basic rate taxpayer, £500 for higher rate taxpayers and £0 for additional rate taxpayers. If you earn interest over your personal savings allowance, then you will need to pay tax. |
How much do I have to deposit? | | While there’s generally no limit to the amount or frequency you can deposit, some banks may require a certain minimum amount of funds for you to receive interest. Additionally, high-interest savings accounts typically have a maximum monthly deposit limit. |
How often can I withdraw my money? | Different cash ISA types have different stipulations. If yours is an easy-access Cash ISA, then you’ll be able to withdraw as many times as you want. Though bear in mind that only flexible ISAs allow you to take money out and deposit again in the same tax year without impacting your annual ISA allowance. | Generally, there are no restrictions when it comes to how often you can withdraw. However, some accounts may only allow you to make one withdrawal a month, while other accounts may have penalties for withdrawing; for example, interest may not be paid for a set period after withdrawal. |
Anything else I should know? | You can choose to open a fixed-rate cash ISA for between one year and five years. How long you want to lock your money away should factor in the forecast for inflation and the Bank of England’s (BOE) base rate. | Some savings accounts are variable, while others offer fixed-term interest rates that may vary in duration. |
To sum up, the main difference between cash ISAs and savings accounts is tax efficiency. If you have savings or think you’ll earn enough savings that will earn more interest than your personal savings allowance, then saving with a cash ISA could be tax-efficient.
However, choosing between a cash ISA and an ordinary savings account depends on your personal circumstances and financial goals. How much are you able to save? Do you need to dip into your savings in the short-term or are you happy to lock it away for the long-term? As always, it’s important to do your research and consider what is best for your current situation.