ISAs and savings accounts both help you save money for the future. But you might be wondering what the difference is, especially as the acronym ISA stands for ‘Individual Savings Account’.
What is an ISA?
It’s a savings account that allows you to save up to £20,000 each financial year, free of UK Income Tax and Capital Gains Tax.
Aviva Stocks & Shares ISA
You can invest up to £20,000 tax-efficiently in the 2024/2025 tax year in a stocks and shares ISA. Make changes or take out money without fees or penalties. Capital at risk.
There are four types of ISA you can take out. You can save up to £20,000 in most of these, or split the allowance across some or all of the other types.
You can pay into an ISA in two main ways: lump sum or regular payments.
- A lump sum means you put a one-off amount of money into your ISA all at once. This could be any amount up to the annual limit.
- Regular payments involve paying a minimum amount on a set schedule, such as monthly.
Both methods are flexible, allowing you to choose how best to save within the limits set by the government. You can take out one ISA or several, and spread your allowance across them to get the most out of tax exemption.
Types of ISA
Here are the different types of ISA's that can help you save for the future:
- Cash ISA
- Fixed rate – you leave your money in the ISA for a set amount of time, often one to five years. For example, if you have £20,000 in an ISA and the interest rate is fixed at 5%, you will receive around £1,000 in interest at the end of the year.
- Instant access – you can pay in and withdraw your money whenever you wish. They’re ideal if you think you might need access to your savings during the year.
- Lifetime ISA - if you’re aged between 18 and 40, you can use this ISA to help you buy your first home or save for retirement. You can pay in up to £4,000 each year and the government will add a 25% bonus to your savings, meaning you could receive up to £1,000 extra annually. Your savings can either be kept as cash, earning tax-free interest, or invested, which could increase your returns over time.
- Stocks and shares ISA – There’s lots of these on the market and it’s worth researching them if you fancy investing in the stock market through funds, bonds or shares. It’s a good option if you’re happy to put your money into investments for several years at a time. Ready-made investment funds are also available to help get you started if you’re not an expert in investing.
- Innovative finance ISA (IFSA) – with this ISA you lend money to, or invest in, a company with debt in the hope of receiving a higher return. You’d need to get professional advice if you choose this type of ISA as it’s a high-risk investment.
Please be aware, if you choose an ISA where your money is invested, it can fall as well as rise in value and you could get back less than you paid in.
What is a savings account?
It’s an account held with your bank or building society. It’s separate from your current account, and you pay into it to build up your savings and earn interest on them.
The savings accounts are:
- Easy access accounts - they’re ideal if you want to save but also have the freedom to dip into your savings when you need to.
- Notice accounts – with this account, you’re usually rewarded with a higher interest rate, but you’ll have to give notice before withdrawing money.
- Fixed term accounts – these savings accounts offer a competitive interest rate as you can’t withdraw your money for a fixed term.
What are the differences between an ISA and a savings account?
The tax benefit is the main difference between an ISA and a savings account. ISAs allow you to save or invest money without paying UK Income Tax or Capital Gains Tax on the interest and growth. Savings accounts don’t offer the same tax benefits, although you do have a Personal Savings Allowance that lets most people earn up to £1,000 in interest without paying tax on it.
Taxation depends on your personal circumstances, and rules may change in the future.
Deposit limits
Most standard savings accounts have no limit on the amount of money you can pay in, but some banks and buildings societies put a cap on the amount you can hold in the account. You may be required to pay a minimum or maximum amount in each month as well.
With an ISA, there is a £20,000 deposit limit which applies to all ISAs you hold and contribute to in a tax year. LISAs have a deposit limit of £4,000 and any LISA contribution you make count towards your total ISA limit of £20,000.
Should I open an ISA or savings account?
Choosing between an ISA or a savings account depends on what you’re saving for and how much flexibility and access to your money you need.
Consider opening an ISA if:
- You want to take advantage of the UK Income Tax and Capital Gains Tax allowance on your savings.
- If you want to invest in stocks and shares in a tax-efficient way.
Consider a savings account if:
- You want an account with no annual limit on how much you can put into the account.
- You want the option of an account with slightly easier access to your money. For example, an easy access account.
Ultimately, when making your decision you should weigh up the tax benefits, access to your money and how much risk you’re comfortable with. It's also a good idea to speak with a financial adviser if you’re not sure which type of savings account is best for you.
