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ISA vs Savings Account – What’s the Difference and What is Best for You?

When it comes to investing, common questions that many people ask are, “are ISAs worth it?”  and “should I get a savings account or ISA?”. While an Individual Savings Account (ISA) or a savings account is a good savings vehicle in the UK, it may not be a suitable choice for everyone.

When considering financial planning, having enough money to survive daily is the least of our expectations. So, how do we factor in bigger aspirations or the ability to cope when emergencies arise? What about when the source of income dries up? This is why people need to save.

❓ What does ISA stand for?Individual Savings Account
✅ The difference between an ISA and a savings account?The difference is that the interests earned in an ISA are tax-free
🔥 Which is better, an ISA or a savings account?It depends on your financial goals and risk tolerance
🙋‍♀️️ Is a savings account better for long-term goals?A savings account is better for a short-term goal

Given that saving is such a crucial part of everyone’s financial lives, the laws of supply and demand have kicked in. The result is that today there are many different ways of saving. This blog will focus on the Stocks and Shares ISA vs savings account option. First, let’s explore the range of savings accounts to see which is best for you.


What is a savings account?

A savings account is a vehicle offered by banks and other financial institutions in which people can deposit money to earn interest.

The rate of interest on traditional savings accounts is currently very low, and starts at around 0.5%. But the main attraction of a savings account is that it allows the saver immediate access to their savings without any prior notice.

Pretty much all saving is a positive financial step, but there are some important differences between the various types of savings accounts.

Various types of savings accounts

There are different types of savings accounts here in the UK, and some include.

  • Easy Access Savings Account
  • Notice Account
  • Fixed-Rate Bond
  • Regular Savings Account
  • Monthly Interest Accounts

The three important savings accounts are the first three listed above. Notice savings accounts offer variable interest rates, and withdrawals are available after a set date. Easy access savings accounts offer variable interest rates with free access to your money at any time.

You can get fixed-rate savings accounts that offer up to around 1.45% interest. However, you will not be able to gain access to your money for a fixed duration – the shorter the duration, the lower the interest rate. A 12-month fixed rate would typically offer an interest rate of 0.75%, whereas a five-year fixed rate might offer up to 1.45% interest.

The current inflation rate when writing this blog has gone above 10.1%. It means that in real terms, money held in savings accounts is losing value.

Moneyfarm does not offer savings accounts to clients. However, we have various investment accounts available to suit your risk tolerance and financial goals.

What is an ISA?

The initials “ISA” stands for Individual Savings Account. An ISA is a type of tax-free savings account in the UK that allows you to save or invest money in a tax efficient manner. The amount of money you can save tax free in a financial year is called an ISA allowance, and it is one of the advantages of ISA investments. The ISA allowance is currently set at £20,000 per annum. This means you can deposit up to this amount every year tax-free.

Various types of ISA accounts

There are five different types.

  • Cash ISA
  • Innovative Finance ISA
  • Junior ISA
  • Lifetime ISA
  • Stock and Shares ISA savings account

When considering whether to invest in any type of ISA savings account, it’s important to ask yourself, “are ISAs worth it? This question ultimately depends on your financial circumstances, investment goals, attitude to risk and time horizon.

A savings account or ISA choice is dependent on several factors. We have highlighted the differences between the two below.

What is the difference between ISAs and savings accounts?

There are disadvantages and advantages of ISA accounts over savings accounts and vice versa. There are several key differences between an ISA vs savings account.

Tax: An ISA is a tax-free wrapper, so any interest earned is completely tax free. However, for a savings account, any interest earned above the personal savings allowance will be taxed. The personal savings allowance (PSA) for a basic rate taxpayer is £1,000, and £500 for a higher rate taxpayer. Additional rate taxpayers don’t have a PSA.

Deposit: The annual allowance for an ISA account is £20,000, which is the maximum deposit limit for an ISA each tax year. A regular savings account has no deposit restrictions; there is no limit or frequency requirement.

Account limit: An individual can only open one type of ISA account each tax year, while there is no limit on how many savings accounts can be opened each tax year.

Withdrawal: An individual savings account gives you access to your money when needed, but fund withdrawals may affect your ISA allowance if you don’t have a flexible ISA savings account. Access to funds in a savings account depends on the type of account, and some accounts have a withdrawal limit or a set number of withdrawals.

Minimum deposit: The minimum amount to open an ISA or savings account is dependent on the account providers.

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Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.

Investment duration: ISAs are suitable for long term investments and huge savings, and the return on investment depends on the interest rates (Cash ISA) or performance of investments held in an ISA (Stocks and Shares ISA). Savings accounts are ideal for short term savings, and returns are also determined by the interest rates received, but remember, taxes can impact the interest earned in a savings account.

Risk: ISAs have some level of risk involved. Some risks include inflation risk, market risk, and capital risk. Cash ISAs have no capital or market risk; however, they are vulnerable to inflation risk. A savings account can only be affected by insolvency and inflation risk. So investors need to ask themselves, “is an ISA worth it with the risks involved?” before investing

ISA or savings account – Which is Best for Me?

The ISA vs savings account comparison listed previously will aid your decision regarding which savings account is suitable for you. The interest rates that Cash ISAs tend to make are pretty much the same as the interest you would get in an ordinary savings account. So, it’s the best savings account for some people, as it’s a level choice, particularly if they’re only saving in the short-term.

A factor to consider when asking, “are ISAs worth it?” is your tax situation. Some savers no longer have to save into an ISA to earn tax-free interest because of the introduction of the personal savings allowance. For instance, basic-rate taxpayers may not have to save into an ISA to earn tax-free interest if they don’t exceed their personal savings allowance. In this instance, a savings account may be ideal. However, the advantages of ISA over a savings account occur if you expect to earn more in the future or are a high-rate taxpayer. As a high earner, ISAs may be a valuable tool for reducing your tax bill.

But when it comes to long-term savings, where the interest is likely to rise above £1,000 per annum after several years, you will start paying tax on anything above that threshold with an ordinary savings account. But with an ISA savings account, the interest carries on being tax-free. So, in this case, the answer to whether an ISA or savings account is more beneficial has to be the ISA.

The best ISA or savings account scenario

The best ISA savings account from the point of view of the interest it can earn is the Stocks and Shares or Investment ISA. They are one and the same thing.

You’ve read how poorly the savings account vs ISA performs concerning interest. A Stocks and Shares ISA offers much higher potential returns. Using figures published on the moneyfacts, in the tax year 2017/2018, investment ISAs showed a return of 4.8%, and in the following year, they showed a return of 4.04%. Over the same period, Cash ISAs returned only 1.01%.

The Stocks and Shares ISA savings account – The risk factor

There is a saying that you have to speculate to accumulate, which comes into play when considering taking out a Stocks and Shares ISA.

Financial markets have a reputation for being volatile, which is clearly in many people’s minds following the COVID-19 crisis.

However, historically, financial markets have always recovered. Nevertheless, it may take them several years to do so, and this is one of the main reasons that when contemplating opening a Stocks and Shares ISA – you need to invest for the long-term.

Putting your savings into an Investment ISA (Stocks and Shares ISA) can produce spectacular results over the long term. It is compound interest coming into play. Basically, the interest your fund makes in one year increases the fund’s value, and it is the new total value against which the interest accrues.

However, it has to be understood that with this type of investment, your fund can shrink and grow, which is the risk.

Final thoughts on the Stocks and Shares ISA v savings account

When considering the Savings Accounts vs ISA decision, it all boils down to two things. Are you looking for long-term investment? And how risk-averse are you? The two are inextricably bound.

The longer you can leave your investment where it is, the better. It could drastically reduce the risk of being forced to take out your savings at a time when the stocks and shares market has dropped.

It also depends on how you build your stocks and shares portfolio. There are high, medium and low-risk options. Which portfolio to choose from depends on your attitude to risk and your knowledge of the markets. You can again benefit from the help of a professional financial adviser or take advantage of the Robo-advisor platforms that are now around. The choice is yours.


Which is better, a savings account or ISA account?

Your ISA vs savings account option will depend on several factors, such as your investor profile, financial goals, age, etc. A savings account is ideal if you want to save small amounts of money for the short term and need easy access to cash. However, ISAs are better for long-term financial goals such as retirement or saving to buy a house.

What are the advantages of ISAs over a regular savings account?

ISAs are tax-free. No income or capital gains tax is imposed on returns in the ISA, while the returns on a savings account are liable to income tax. ISAs are flexible and offer a wide range of investment opportunities, making them earn better interest than a regular savings account. In addition, your spouse may be able to inherit your ISA tax-free.

What are the disadvantages of an ISA?

Tax-free contributions towards an ISA are limited. The ISA allowance for the 2022/2023 tax year is £20,000, and any unused annual allowance is not carried forward. Investments held in an ISA can lose value due to stock market volatility, and ISAs might not be suitable for short-term investments. You can only open one ISA per tax year and can’t withdraw money from all types of ISAs.

Are ISAs worth it?

The decision of whether ISAs are worth it depends on an individual’s specific circumstances and investment objectives.

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Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.

*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.