Cash ISA vs savings account: which could suit you?

Cash ISAs offer the advantage of tax-free savings, shielding the interest you earn from taxation; however, they are also currently limited by a £20,000 annual deposit allowance. While standard savings accounts don’t provide protection from tax, your PSA (Personal Savings Allowance) may still provide you with some tax-free interest. Savings accounts are also generally free from an annual deposit allowance and allow you to move your money between providers more easily than ISAs, which require a more complex transfer process.

What is the key difference?

When comparing a Cash ISA vs savings account, the key difference is that an ISA gives you the benefit of 100% tax-free savings. In a savings account, your interest is taxed if it exceeds your PSA. The key trade-off to keep in mind is that ISAs are limited by an annual ISA allowance, meaning you can currently only deposit up to £20,000 a year into a Cash ISA.

What account conditions should you check?

Alongside the current ISA allowance of up to £20,000 a year, there are several other ISA rules to be aware of. Firstly, Cash ISAs are only available to UK tax residents. There’s also currently no option to open a joint account ISA, however, this equally means that couples can benefit from their own individual £20,000 annual allowances.

Savings accounts also sometimes offer higher interest rates than Cash ISAs, to offset the fact that they are not protected from tax. As a result, it’s worth calculating the AER (Annual Equivalent Rate) when comparing savings accounts against Cash ISAs to see which will actually generate the higher annual returns.

How do access and withdrawal rules compare?

Savings accounts and Cash ISAs offer similar types of accounts: easy access accounts which allow you to access your money immediately, and fixed-rate bonds which lock your savings away with the benefit of a consistent interest rate. The key difference in how you move your money is that ISA transfers follow an official process which can require paperwork and take longer than most normal transfers.

While a regular savings account transfer can be processed in a matter of hours, ISA transfers must adhere to a specific legal process in order to preserve the tax-free status of your savings. You must directly contact your providers to transfer ISA funds, rather than being able to instantly do it yourself, and you can expect the process of an ISA transfer to takes between 15 to 30 days.

How do tax rules affect the choice?

The amount of tax you pay on your savings in a regular savings account is determined by your personal tax band. Basic rate taxpayers can earn up to £1,000 in annual interest, higher rate taxpayers are limited to £500 and additional rate taxpayers don’t have a Personal Savings Allowance, meaning they pay tax on all their savings interest. When deciding which account could suit you, knowing which of these three brackets you fall into will help determine how attractive the tax-free savings of a Cash ISA can be compared to a savings account.

Which could suit you?

To summarise the points above:

• Cash ISAs have the benefit of shielding your savings interest from tax, however your PSA still means you can earn some tax-free interest in a savings account depending on your tax bracket.
• ISA accounts are also currently limited by a £20,000 annual ISA allowance, whereas savings accounts often have no annual deposit limits.
• Cash ISAs are only available to UK tax residents and can’t be opened as joint accounts.
• Cash ISAs require a more complex transfer process than the fast, simple transactions of standard savings accounts.
• The more limited your PSA, the more you could benefit from a Cash ISA by shielding your interest earnings from tax.

Frequently asked questions

What are the advantages of a Cash ISA?

Cash ISAs allow you to earn interest without paying tax on it, whereas standard savings accounts are limited by your Personal Savings Allowance. So, you can potentially earn higher interest in an ISA, subject to rates and AER.

Do savings accounts have higher interest rates than Cash ISAs?

Savings accounts generally offer higher interest rates than ISAs, as a way for lenders to compete with their tax-free savings advantage. In some instances, these higher interest rates can sometimes offset the tax you pay and potentially leave you with more overall than a Cash ISA.

Why might I choose a savings account instead of a Cash ISA?

Alongside generally stronger interest rates, savings accounts aren’t limited by the annual ISA allowance and therefore often allow you to deposit as much money as you want. ISAs also don't offer the option of joint accounts, which some couples prefer to individual savings pots, and ISAs have more complex rules around managing transfers of their funds compared with the simpler transfer process for standard savings accounts.

Where can I check the latest rules and product terms?

You can review the current and planned HMRC rules on their .gov portal here: https://www.gov.uk/government/publications/reduction-in-the-cash-individual-savings-account-isa-limit/cash-individual-savings-account-isa-limit-reduction

Charter Savings Bank’s ISA page is also a great place to compare available products: https://www.chartersavingsbank.co.uk/products/isas

Next steps

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