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What’s the difference between a cash ISA and a savings account?
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.
Cash ISA vs savings account
So, cash ISA or savings account?
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.