Cash ISA vs savings accounts: Which is better?

In normal savings accounts, you’d get taxed on whatever you earned in interest. A cash ISA lets you keep 100% of the interest, which is why it has been a popular option among UK consumers for years.

And after years of meagre interest rates, savings are back with a vengeance. In 2021 you’d have been hard pressed to earn enough interest from your savings to make a cash ISA a worthwhile prospect, but in 2024 cash ISAs can once again offer meaningful savings.

Is an ISA worth it?

You can use this calculator to see whether an ISA could reduce the tax you pay on savings interest. Please note, it assumes that you pay income tax. Calculations are estimates only.

In the UK, savers have a “Personal Savings Allowance“, which is an amount of interest you can earn from savings without having to pay tax on it. For basic rate taxpayers that’s £1,000, while for higher rate taxpayers it’s £500. And for reference, £12,500 in savings at at 4% would earn £500 of interest over a year. Above your Personal Savings Allowance, all interest earned is tax-deductable, unless it’s held in an ISA (assuming you’re already maxing out your income-tax-free personal allowance).

But deciding between a cash ISA or a standard savings account also comes down to the interest rates currently being offered on each type of product. Plus, even if an ISA might not save you money on tax this year, you might still pay into one so that you’re using your ISA allowance in this tax year, and keeping future tax year allowances free. In our guide to savings accounts vs cash ISAs we take you through what each are and the pros and cons of both plus you can use our calculator to gauge any benefit in your own unique situation.

Today’s highest rates on cash ISAs

Today’s highest rates on other savings accounts

What is a savings account?

As the name suggests, a savings account is a bank account that’s designed to hold your savings.

Unlike with a current account, you don’t get a debit card and you won’t be able to receive your salary in it or set up direct debits or standing orders. Instead, you can only withdraw or deposit money in it. In exchange for keeping your savings there, you’ll earn an interest rate.

What is a cash ISA?

A cash ISA is a savings account where you don’t pay tax on the interest you earn. Everything you can do with a normal savings account you can do with a cash ISA. The tax-free bit is the only real difference.

Any person over 16 in the UK can put £20,000 into a cash ISA each tax year. Once your money is in a cash ISA, it stays tax-free year in year out.

Fixed savings accounts bring better returns

Those who can afford to lock away money can get a better rate. The obvious down side is that the money is locked away. Customers don’t have access to funds until the end of the committed term. Compare fixed-rate savings accounts here.

Some ISAs allow for flexible access to the cash, but this is reflected in usually lower interest rates.

Current accounts can offer joining bonuses

Current accounts are the account you use for day to day personal finances. They can sometimes offer even higher returns compared to ISAs and savings accounts.

This is usually through either interest rates, though it’s also important to take joining bonuses into account. Some banks will give new customers hundreds of pounds if they meet certain criteria (usually you have to earn over a certain amount). You can view the latest switch offers here.

Don’t rule out the ISA yet

While better rates can be found if shop around, ISAs are still appealing to a lot of people. Here are a few reasons why:

1. Long term tax shelter. By topping up your ISA, you can ensure long-term protection, even though interest rates might be poor.
2. You can inherit ISAs. ISAs can be passed on after death, which is not the case with all savings vehicles.
3. ISAs are immune to tax thresholds. A pay rise could see you tip over the taxpayer threshold. This makes no difference to what’s held in an ISA.
4. Flexible ISAs. You can now take money out of ISAs and replace it in the same tax year without impacting your allowance. Rules around this vary from provider to provider, so make sure you check before withdrawing money. Learn more about this feature here.

Bottom line

Standard savings accounts and cash ISAs are both useful places to store your savings and it can be worth having some money in each. A cash ISA can be particularly beneficial at a time when interest rates are on the rise as, if you have a decent amount saved up, you could reach your personal savings allowance threshold. Saving money in a cash ISA will ensure you never have to pay tax on it.