ISA vs savings accounts

If you're new to saving or want to be more strategic about where you put your money, you might find yourself overwhelmed by the various types of accounts available, each with its own rules and features that you need to understand.

ISAs and savings accounts are the two main ways to save money in the UK, similar at first glance, but governed by different rules.

In this guide, we'll cover what matters so you can choose the right one for you.

What is an ISA?

An ISA is an Individual Savings Account that allows you to personally save or invest up to £20,000 tax-free, every tax year (6 April to 5 April) to encourage long-term saving. 

This means any growth on your ISA savings, whether interest, dividends, or investment gains, is tax-free. So, if you put in £20,000 to your ISA and it grows to £25,000, the £5,000 growth is entirely tax-free.

There are several ISA types, and you can spread your £20,000 allowance across more than one, just don't exceed the limit. Note that the Lifetime ISAs has its own contribution limit of £4,000.

For adults saving for their children, the Junior ISAs also has its own limit of £9,000, however any money saved can't be accessed until the child turns 18.

If you want a full breakdown of what ISAs are, read our full blog.

Types of different ISAs

There are four key types of ISAs for adults to choose from, including:

• Cash ISAs: Act like a traditional savings account with a fixed or variable interest rate (currently you can save up to £20,000 tax-free limit in a cash ISA until April 2027, when this limit changes to £12,000 for under 65s).
• Stocks and Shares ISAs: Contribute up to £20,000 every tax year to invest in stocks, bonds, and funds through an ISA, with any dividends or capital gains free from Income and Capital Gains Tax.  This type of ISA has the potential to outperform a Cash ISA over the long term, however returns aren't guaranteed. (Capital at risk)
• Lifetime ISAs: Designed for people aged 18–39, a Lifetime ISA is a tax-free savings account that allows you to contribute up to £4,000 per tax year, either towards a first-time home or for later life. The government adds a 25% bonus on contributions, up to £1,000 per tax year, on top of any interest offered by your provider.
• Innovative Finance ISAs: You can lend money to individuals or businesses through peer-to-peer lending platforms, earning tax-free interest.

In addition to their own ISA allowance, parents can also save for their children using a Junior ISA:

• Junior ISAs: Parents or guardians can save/invest up to £9,000 every tax year (tax-free) for their child, either in a Stocks and Shares or Cash Junior ISA, which the child can access when they turn 18. The Junior ISA allowance is separate from the parent or guardians ISA allowance as it is the child’s personal ISA allowance. (Capital at risk with Stocks and Shares Junior ISAs)

What is a savings account?

A savings account is a pot of money that earns interest over time. Likely to be separate from your main bank account which is used for everyday spending like bills. Most banks, building societies, and other financial providers offer a range of savings accounts.

Types of savings accounts

Here are some of the most common savings’ accounts that you can choose from:

• Easy access savings accounts: Earn interest and withdraw from this account with little to no barrier, depending on the account's specific terms. (Interest paid will typically be variable)
• Notice savings accounts: These accounts require you to give notice before you withdraw your money. The notice period will be defined on the account, common notice periods include 30, 90, and 120 days. 
• Limited access account: Access might be limited to a fixed number each tax year, or fees may apply. 
• Fixed-term savings accounts: This is where you lock your money in a savings account for a fixed term, meaning you can’t withdraw until the fixed term has ended. Terms can vary in length, with 1-5 years being common. 

The interest rate you earn on your account will depend on both the provider and the type of account you choose. Generally, accounts that require you to lock your money away for a set term tend to offer higher rates than easy access savings accounts, rewarding you for leaving your money untouched for longer.  

It’s important to remember that these accounts can come with either fixed or variable interest rates:

• Fixed interest rate: Your interest rate will stay the same, meaning it’s a more predictable return when it is applied.
• Variable interest rate: How much interest you earn will change depending on what the provider is offering and this may be impacted by factors, such as the Bank of England base rate, market conditions, offers coming to an end, etc.

Knowing whether the rate on your account is fixed or variable can help you make a more informed decision about which account might best suit your savings goals.

ISA vs savings account: how do they compare?

So, which should you choose? Understanding the differences between ISAs and savings accounts can help you make a more informed decision:

Cash ISA vs savings account

As Cash ISAs are the most similar to standard savings accounts, these are typically the two that people will compare when they’re looking to save their money.

If you're looking for a fixed-term savings account with guaranteed returns, a fixed rate bond could be worth considering. Take a look at our bond range* to find an option that suits you.

Benefits and drawbacks of ISAs

Like any savings product, ISAs have their pros and cons. Your own circumstances and savings goals will help determine whether one is right for you. 

Here's a breakdown of the key points to consider:

Pros

• There are various ISA account types to choose from, depending on your goals including: Long-term investing, first-time home purchase and children’s savings.
• You can save or invest up to £20,000 each tax year using your ISA allowance, with any returns and dividends earned tax-free. Contribution limits may vary depending on the type of ISA.

Cons

• Not all ISAs have the same rules for withdrawals, so make sure to do your research.
• Certain ISAs have age restrictions.
• Not all ISAs carry the same level of risk, for example, a Stocks and Shares ISA is considered higher risk than a standard savings account.
• Certain accounts may include fees or require minimum deposits to open.
• There is a cap on the tax-free money you can add to your ISAs (£20,000 per tax year).

Benefits and drawbacks of savings accounts

Savings accounts also come with their own benefits and drawbacks, and as before, the right choice will depend on your own circumstances and savings goals.

Here's what to consider:

Pros

• No limit on how much you can save.
• You can save money while earning interest.
• For the majority of people (basic tax rate or higher tax rate earners), you get a personal savings allowance (PSA).

Cons

• The tax advantages aren’t as prominent for savings accounts.
• Low returns can potentially be outpaced by inflation.
• Some accounts may have fees included or minimum deposits to open the account.
• Some accounts may have withdrawal limits on the number of times you withdraw, the amount of money you withdraw, or require advance notice (varies product by product). 

Should I get an ISA or a savings account?

Whether you should open an ISA or a savings account depends on your personal circumstances, as there are many different account types and scenarios to consider. Ultimately, it depends on your situation. Doing your own research or speaking to a financial advisor can help you make the best choice.

Remember, nothing is stopping you from having both an ISA and a savings account at the same time. There are many ways you can use some or all of these accounts together to better plan and maximise your savings growth. 

That’s why financial education is so important, so you can make the right decision for your own needs.

Can you open an ISA and savings account at the same time?

Yes, you can open an ISA and a savings account at the same time. In fact, you can have different types of ISAs and multiple savings accounts open at the same time. However, remember that with an ISA, you can save up to £20,000 across all ISA types, and having multiple accounts open may make it harder to keep a track of. 

There’s no right or wrong number of accounts to have open; it comes down to what makes you feel comfortable with your money so you can manage it effectively without getting overwhelmed. 

ISAs and savings accounts may offer value for anyone looking to grow their funds and take advantage of tax-free savings opportunities, whilst also having an easy access savings account for emergencies.

You may want to consider consulting a qualified financial adviser for personalised guidance. You can find a local advisor at unbiased.co.uk. Keep in mind that financial advice may come with a fee, so be sure to ask about costs before receiving advice.

Find out more about Unity Mutual's range of savings and investment products.*

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