ISA vs savings account

Should I open an ISA or a savings account?

They both have their uses, and both are safe and reliable ways of saving money. To understand whether you should open an ISA or a savings account, we need to first take a look at how they’re different.

What is an ISA?

ISA stands for Individual Savings Account, and it’s a great way to save money in a tax-efficient manner. Every financial year (from April to April) the UK government determines how much can be saved in an ISA that financial year.

Providing you don’t save more than that limit, you won’t be taxed on any interest you earn from your ISA. If you own an ISA, you should stay up to date with this limit as it can change from year to year.

What is a savings account?

Savings accounts come in a variety of shapes and sizes, but their core function is to house your money and earn interest. Unlike an ISA, after a set amount you may be taxed on the interest your money earns in a savings account. 

What benefits do ISAs have?

The main benefit of an ISA is that the interest you earn is tax free. If you’re saving large sums of money every year, an ISA is a popular way of making those savings go a little further. Likewise, any profits you make from investments in a stocks and shares ISA are tax free too. 

Generally, you’re able to withdraw cash from your ISA without incurring any penalties, though that isn’t always the case. You must be 18 or over to open an ISA.

There are four types of ISA. These include:

Stocks and shares ISAs

These are used to shelter investments of various types from investment tax (providing they stay below the saving limit).

Cash ISA’s

Cash ISAs are the more common type, and function much like a typical savings account except your interest is tax-free. These can either be variable (meaning interest can go up or down) or fixed (meaning interest stays the same for the agreed upon term.)

Innovative finance ISAs

These allow you to use your tax-free ISA allowance to invest in things like crowdfunding and peer-to-peer lending. This can mean your money isn’t instantly accessible if you need it.

Lifetime ISA’s

The government offers a 25% boost on a lifetime ISA, which you can take out from the age of 18 until you’re 40. You can deposit up to £4,000 a year until you’re 50. You can open a Lifetime ISA if you’re aged 18 to 39.

What benefits are there with opening a savings account?

Unlike ISA’s, there’s no set annual limit on what you can put into a savings account. With most savings accounts it’s also easy to access your money. While there are fixed rate accounts that limit how easily you can withdraw money, easy access savings accounts are typically easier than an ISA. This can be beneficial if you don’t feel comfortable locking your money in one location for an extended period of time. There may be a minimum or maximum deposit that can be made into accounts.

You can be taxed on the interest you’ve earned in a savings account, but this depends on your personal circumstances, including your personal savings allowance.

Types of savings accounts

The most popular savings account types include:

Fixed term accounts

Generally, a fixed term account tends to restrict how much and how often you can access your money. They’re designed to keep your money in one place for an agreed period, or fixed term, and earn you a fixed amount of interest.

Easy access accounts

Unlike fixed term accounts, easy access accounts allow you to dip into your pot as and when you like. Typically, there won’t be penalties for withdrawing your money from an easy access account. However, your interest rate may go up or down, as it’s rarely fixed in an easy access account.

Regular savings accounts

A regular savings account will typically come with a higher interest rate than most other savings accounts. Though there will also be a limit to how much money you can contribute a month, there may be limitations on when or how many times you can access your money, and these plans have a fixed term, which is usually a year.

Learn more about the savings accounts Sainsbury’s Bank offers.