Cash ISA vs savings account
When it comes to growing your savings, understanding the difference between a cash ISA and other types of savings accounts is important. Both are ways to save whilst earning interest, but they work in different ways, particularly in how interest is taxed.
The best choice depends on your financial goals, how much you plan to save, and whether you’re likely to pay tax on your interest.
Both cash ISAs and savings accounts can be used for short to medium-term financial goals or as an emergency fund.
The main advantage of a cash ISA is that the interest you earn is tax-free, while interest from a savings account may be taxed if it goes over your Personal Savings Allowance. Cash ISAs also have a yearly deposit limit of £20,000 for the current tax year, while you can save more than this with most savings accounts. Both types of accounts vary in terms of access: some allow you to withdraw money at any time, while others may lock your funds for a fixed period.
In this guide:
Key differences between a cash ISA and a savings account
Features of a cash ISA
A cash ISA is a type of Individual Savings Account (ISA) that allows you to earn interest on your savings without paying any tax.
You can save up to £20,000 in each tax year (from 6 April to 5 April the following year). You earn interest on your savings and can keep it all tax-free. To use a cash ISA, open one with your bank or building society, deposit money into it, and let your savings grow. When the new tax year starts, your £20,000 annual ISA allowance resets, and you can continue saving.
There are different types of cash ISA.
- An instant access cash ISA allows you to withdraw money whenever you need it while still earning interest. Please note, any withdrawals made that are replaced within the same tax year count towards your ISA allowance.
- A fixed-rate cash ISA means that in exchange for a guaranteed interest rate, your money is locked away for a set period. Please note, you can still withdraw from fixed rate cash ISAs, but there could be a penalty (depending on the provider).
- A flexible ISA allows you to withdraw money and replace it within the same tax year, without affecting your ISA allowance. Please note, we don’t currently offer flexible ISAs at The Co-operative Bank.
Each type of ISA has its advantages and disadvantages, so it's important to understand these before opening one.
Considerations of a cash ISA
A cash ISA could be the better choice if you want tax-free interest regardless of your income, assuming you plan to save no more than £20,000 each tax year.
- Tax-free interest - You don’t pay tax on the interest you earn, which is helpful if you’re likely to go over your Personal Savings Allowance (PSA). If you are within the PSA limit, then you will not have to pay tax. The PSA limit depends on the tax rate you pay.
- Variety of options - Choose from fixed-rate, flexible, or instant-access ISAs, depending on your preferred savings approach.
- Deposit limits - You can only save up to £20,000 in the current tax year.
- Restrictions - You can open and pay into multiple cash ISAs per tax year, as long as you don’t exceed the £20,000 deposit limit. You can also keep cash ISAs from previous years open and pay into them. Please be aware that some providers may only let you deposit into one cash ISA with them per tax year.
To explore different options, compare our Cash ISAs and determine which one suits your needs.
Features of a savings account
A savings account is an account where you can store your money while earning a rate of interest.
Interest earned on savings accounts may be subject to tax, but if your interest stays within your Personal Savings Allowance (PSA), you won’t have to pay any tax on it. The PSA limit depends on the tax rate you pay. If you exceed your personal savings allowance, interest may be taxable.
Considerations of a savings account
A savings account may be a better option if you want higher deposit limits. Unlike cash ISAs that have a deposit limit of £20,000 each tax year, you can save more than this with most savings accounts.
- Higher deposit limits - Savings accounts often allow you to deposit more than the £20,000 limit of a cash ISA. For example, some accounts allow balances up to £1,000,000.
- Taxable interest - Unlike a cash ISA, the interest earned may be taxed if it exceeds your Personal Savings Allowance (PSA). A consideration for those whose earnings are below the annual personal tax allowance is that they can enjoy the starting rate of 0% on savings income of up to £5,000.
Key differences between a cash ISA and a savings account
With a cash ISA, any interest earned is completely tax-free, regardless of the amount. In contrast, interest on a savings account may be taxed if it exceeds your Personal Savings Allowance. Another important difference is the annual limit. Cash ISAs have a maximum allowance of £20,000 for the current tax year, while savings accounts typically have higher limits on how much you can deposit.
In terms of access, both types of accounts offer various options, including instant access, fixed-term accounts, and limited-access versions.
Finally, transfers between cash ISAs can be made without losing the tax benefits as long as they follow ISA rules. For savings accounts, however, transfers are usually subject to the terms of the specific provider.
Different types of ISAs and savings accounts
There are different types of cash ISAs and savings accounts, including:
- Instant access ISAs and savings accounts – save what you like, when you like, with instant access to your money
- Fixed-rate ISAs and savings accounts – earn a fixed rate of interest for a fixed term
- Flexible ISAs – replace money you’ve withdrawn in the same tax year, without affecting your ISA allowance
- Limited access savings accounts - access your money when you need it, get a better interest rate if you make fewer withdrawals
- Regular savers - these require you to deposit money regularly (usually lower amounts), often offering better rates for consistency.
Each type suits different savings goals, so choose the one that best fits your needs.
Choosing between a cash ISA and a savings account
It’s possible to have a cash ISA and other types of savings accounts open at the same time. If you’d prefer to just have one account open, and you’re deciding between a cash ISA and other savings account options, you should consider:
- how much you plan to save
- how often you’ll need access to your money
- the interest rates available
- whether you’re likely to pay tax on your savings interest.
To help you decide whether a cash ISA might benefit you, this table shows the amount you'd have to save to reach the PSA limits. Your limit will depend on the tax rate you pay.
If you're planning to save under £20,000, you could place it all in a cash ISA and enjoy tax-free growth. Anything above that may need to be placed in other types of savings accounts.
Lastly, interest rates vary between products. Always compare options and review the terms of access, as penalties or restrictions on withdrawals may impact your overall strategy.
If you’re deciding between the two, consider your personal savings goals, the amount you plan to save, and how often you’ll need to access your money.
Ultimately, the right choice depends on your circumstances. Take time to review your financial situation and compare account features carefully.
Are you looking to compare options? Explore our savings accounts to find one that best suits your needs.
Savings terms explained
AER stands for Annual Equivalent Rate and shows what the interest rate would be if interest were paid and added to your account each year.
Business day is usually Monday to Friday excluding bank holidays.
Calculated daily means the interest earned is based on the amount of money in your account at the end of each business day
Calendar month means from midnight on the first day of a month to 11.59:59pm on the last day of the month.
Fixed interest means the rate stays the same until the account matures.
Gross is the rate of interest payable before any tax is taken off.
Tax-free means you will not pay any tax on your interest.
Tax year runs from 6 April to 5 April.
Variable interest means that it could go up or down.
Please note: any reference to tax is based on our understanding of current tax regulations which may change in the future and depend on the customer's individual financial circumstances.
The Co-operative Bank reserves the right to decline or accept any application and/or deposit.
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