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ISA vs Savings account – Which is best?

If you want to grow your wealth over time, developing good saving habits can be an important first step. Of course, it’s also important to find the savings vehicle that’s right for you.

Typically, two of the most popular options for growing your wealth are savings accounts and Individual Savings Accounts (ISAs). However, both of these sound very similar and so it isn’t immediately obvious what the differences between them are.

If you want to know which is better in the matchup of ISA vs savings account, read on for everything you need to know.

Key takeaways

  • ISAs are a tax-efficient way to grow your savings.
  • Each tax year, you have an allowance for how much you can contribute to an ISA but you can contribute an unlimited amount into a normal savings account.
  • There are a variety of different types of savings accounts, so it’s important to find the one that’s right for you.
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Interactive Investor

  • The number one choice for ISAs
  • Open an ISA account for £9.99
  • Contribute as little as £25 per month

Important information - investment value can go up or down and you could get back less than you invest. If you're in any doubt about the suitability of a Stocks & Shares ISA, you should seek independent financial advice. The tax treatment of this product depends on your individual circumstances and may change in future. If you are uncertain about the tax treatment of the product you should contact HMRC or seek independent tax advice.

What is a savings account?

A savings account is exactly what it says on the tin: an account that you can save money into and earn interest on it.

One of the most popular types of savings accounts is an “easy access savings account”. As the name implies, the main benefit of this type of account is that they are highly flexible.

This means that you have a high degree of freedom to deposit and withdraw money whenever you want. Bear in mind that you may sacrifice some interest for the flexibility this type of account offers.

What other kinds of savings accounts are there?

While easy access savings accounts are some of the most popular, there are different types that you could consider, such as:

Notice accounts

This type of account allows you to make withdrawals after a fixed notice period such as 30 or 90 days. While they aren’t always as flexible as an easy access account, the amount of interest you earn on your savings can sometimes be higher.

Fixed-rate bonds

If you want to grow your wealth, another option is to buy fixed-rate bonds, which can provide you with guaranteed returns over a set term. Typically, this period is between six months and five years, and the interest rates are generally more competitive the longer this term is.

Also consider: Will interest and savings rates rise in 2022?

How much can you save into a savings account?

A key benefit of savings accounts is that you can, theoretically, contribute as much into it as you like.

It’s important to note here that each tax year (6 April to 5 April), you have a Personal Savings Allowance, which is essentially how much you can earn in interest before you have to pay tax.

If you’re a basic-rate taxpayer, you can earn up to £1,000 in interest tax-free. If you’re a higher-rate taxpayer, your allowance falls to only £500 a year. Additional-rate taxpayers are not eligible to qualify for a Personal Savings Allowance.

Is my money safe in a savings account?

While you can save as much as you like into a savings account, this may leave you wondering what would happen if your bank failed.

Thankfully, as long as your bank is authorised and regulated by the Financial Conduct Authority, your money is protected by the Financial Services Compensation Scheme (FSCS).

This means that up to £85,000 of your money is protected if your bank collapses and isn’t able to pay out your savings.

Of course, it’s important to bear in mind that if you have more than this amount with a single bank or building society, any money over the limit won’t be protected by this scheme. This is why it can often be sensible to spread your money across a range of different institutions so that you receive the maximum coverage.

What is an ISA?

An Individual Savings Account, or ISA, is a type of savings vehicle that you can use to grow your wealth in a tax-efficient way.

One of the most well-known benefits of saving with an ISA is the fact that any interest or returns on your money are paid to you entirely free from Income Tax or Capital Gains Tax (CGT). This means you can grow your wealth much more efficiently.

Of course, it’s important to bear in mind that ISAs are considered to be “tax-efficient” rather than completely “tax-free”. This is because when you pass away, they may form part of your estate, and so be subject to Inheritance Tax.

What types of ISAs are available?

If you want to grow your wealth with an ISA, there are a variety of different types of savings accounts that you could use. These include:

Cash ISA

Cash ISAs are one of the most popular types of savings accounts and allow you to hold your wealth in cash while receiving regular interest payments.

Similar to other savings accounts, interest rates for Cash ISAs tend to vary between providers, which is why you may want to scour the market to find the best one for you.

Just like with normal savings accounts, there are typically two main types; fixed-rate Cash ISAs and easy-access Cash ISAs.

With the former, you could get a higher rate of interest but will usually have to hold money in your account for a set period. With the latter, you may see a lower interest rate but will have a greater degree of flexibility, meaning you can usually make deposits and withdrawals whenever you want.

Stocks and Shares ISA

With a Stocks and Shares ISA, sometimes known as an “investment ISA”, you can grow your money by investing it in the stock market within the ISA “wrapper”.

A key benefit of doing so in this way is that any returns generated by your investments will be paid to you Capital Gains Tax-free.

Of course, it’s important to bear in mind that all investments carry an element of risk. The value of your investment may rise and fall and you may not get back the amount you invested.

How much can you save into an ISA?

Since ISAs get favourable tax treatment, there is a limit to the amount that you can save into them in any given tax year, which is 6 April to 5 April.

This limit is called the “ISA allowance” and in the 2021/22 and 2022/23 tax years, it stands at £20,000.

It’s important to note that this allowance is for all of the ISAs that you may own, not per account.

Frequently asked questions

Is a savings account better than an ISA?

Both ISAs and savings accounts have advantages and disadvantages, so one isn’t necessarily better than the other. It all depends on what you need, as depending on your circumstances, a savings account might suit you better than an ISA.

What’s the difference between an ISA and a savings account?

While both ISAs and savings accounts can be good ways to grow your wealth, there are some key differences that you need to be aware of.
The main difference between ISAs and normal savings accounts is that with an ISA, any interest or returns are paid to you tax-free.
However, because of this useful benefit, you have a limit on how much you can contribute to an ISA in any given tax year.

Why have an ISA over a savings account?

One of the main advantages that ISAs have over savings accounts is that you don’t have to pay any tax on the interest or returns that the account generates. This can help you to build your wealth more effectively.

What are the disadvantages of an ISA account?

One of the downsides to using an ISA is that there is a limit to how much you can contribute to them in any given tax year. This is known as your “ISA allowance” and in the 2021/22 and 2022/23 tax years, stands at £20,000.

Please note:

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

This article is for informational purposes only and does not constitute financial advice. All contents are based on my understanding of HMRC legislation, which is subject to change.

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