ISA or savings account: Best options explained (2024)

FAQs

ISA or savings account: Best options explained? ›

If you want to protect yourself from paying tax on any interest income, then an ISA may be your best choice. But if you want to frequently add and withdraw money, a general savings account may better suit your needs.

Whether a Cash ISA or a standard savings account is best for you will depend on your circ*mstances. People often choose to invest in ISAs for long-term larger investments and use other savings accounts for smaller short-term savings. However, you should make the decision based on your unique needs and budget.

Stocks and shares ISAs carry a higher risk as well as a higher potential for rewards, depending on where the money is invested. It's important to work with an independent financial advisor if you're investing in a stocks and shares ISA because there may be a possibility of capital loss.

Normal savings beat cash ISAs for most.

If you won't make this much interest, you won't pay any tax, so should focus on moving your money to the highest interest rate, which is usually in a Top Savings Account.

What's the difference between ISAs and savings accounts? It really comes down to tax. You don't pay tax on any potential returns from ISA contributions, while interest accrued on savings accounts can be taxed if it exceeds the personal savings allowance.

Putting money into an ISA

Every tax year you can save up to £20,000 in one account or split the allowance across multiple accounts.

If your investments have dropped in value, you might be asking yourself “why is my ISA losing money?”. It's important not to worry. Remember, it's completely normal for investments to go up and down in value and you haven't lost any money yet - unless you sell your investments for lower than you paid.

In times of low interest and high inflation, ISAs aren't always the best place for your savings. This is because the amount of interest you can earn, which is often linked to the Bank of England's base rate, usually doesn't beat the rate of inflation.

The biggest mistake anyone can make when looking to invest or make cash savings is to not take advantage of the ISA tax-free allowance at all, whether it be a cash ISA or a Stocks & Shares ISA – even if they can only use a portion of it, it's generally a good idea to contribute what you can.

ISAs are a simple way to grow your money in a tax-efficient manner. You can invest up to £20,000 in your ISA each year, whether it's a cash ISA, an innovative finance ISA, or a stocks and shares ISA, and you can watch your money grow within your tax-free wrapper, including any income you build up.

What does Martin Lewis say about ISAs? ›

"For most people with fixed rate cash ISAs, I can't promise everyone, but certainly enough of you very close to the end of it should be ditching them, paying the penalty, and putting them [the money] in somewhere that pays more at the moment."

You can transfer all or part of the savings in your Individual Savings Account ( ISA ) from one provider to another at any time. It can be to a different type of ISA or the same type.

Individual Savings Accounts (ISAs)

The government sets a maximum amount that you can invest in ISAs each year. For the 2024/25 tax year, this limit is £20,000. You pay no Income Tax on the interest or dividends you within an ISA and any profits from investments are free of Capital Gains Tax.

If you want to protect yourself from paying tax on any interest income, then an ISA may be your best choice. But if you want to frequently add and withdraw money, a general savings account may better suit your needs.

Disadvantages: Depending on the ISA account you choose, you may have to commit to locking away your cash for a set amount of time. The interest rates on ISAs can be variable, potentially offering lower returns compared to other savings accounts.

You can pay up to £20,000 into a Cash ISA each tax year. Returns on an ISA are tax-free, so you get to keep more of the interest you receive. An alternative to a cash ISA is a high-interest savings account. These work in a similar way to Cash ISAs, but you any interest you receive is taxable.

For short-term goals such as an emergency fund or a holiday, ISAs and savings accounts can still be a good place to save up. For long-term savings such as retirement, however, you should consider investing to help your money grow over time.

The biggest difference between saving and investing is the level of risk taken. Saving typically results in you earning a lower return but with virtually no risk. In contrast, investing allows you the opportunity to earn a higher return, but you take on the risk of loss in order to do so.

Individual Savings Accounts (ISAs)

The government sets a maximum amount that you can invest in ISAs each year. For the 2024/25 tax year, this limit is £20,000. You pay no Income Tax on the interest or dividends you within an ISA and any profits from investments are free of Capital Gains Tax.

A Junior Cash ISA is similar to a bank or building society savings account although the money is locked in and cannot be withdrawn until age 18. But Junior Cash ISAs come with one big advantage – your child doesn't have to pay tax on the interest they earn on their savings, and you don't have to either.