ISAs vs savings accounts: which is better for you?

What is an ISA?

An ISA is a wrapper that allows your money to grow free of tax.

You can put £20,000 into an ISA every tax year, in cash savings, investments or a mixture and can build your ISA up over time.

However, from April 2027, the annual cash ISA limit will change.

You'll be able to pay £20,000 in a stocks and shares ISA or divide this between cash and stocks and shares (up to £12,000 in a cash ISA, while the remaining £8,000 can be invested in stocks and shares).

Provided you stay within this limit, you won’t pay tax on the interest you earn or any investment growth or dividend payments within your ISA ‘wrapper.’

There are several types of ISA, including: 

• Cash ISAs: This is similar to an ordinary savings account, but your interest is protected from tax. 

• Stocks and shares ISAs: These protect a range of investment incomes from tax.

• Lifetime ISAs: A tax-free savings account that you can use to buy your first home or save for retirement.

• Junior ISAs: A long-term, tax-free savings account for children with an annual limit of £9,000.

Exactly which option you choose will depend on your financial goals. 

Except in the case of lifetime ISAs, you can have multiple ISAs of the same type and choose to put all your allowance into one ISA or split it between several.

Additionally, savers are now allowed to open multiple ISAs of the same type within a tax year without losing their tax-free ISA allowance.

You can't carry over your ISA allowance into future years, so if you only invest £10,000 in one year, that doesn’t allow you to invest £30,000 in the following year. It’s currently a £20,000 limit each year.

An ISA can be tax-efficient if you’re saving up to £20,000 in the tax year 2025/26, and it can be passed on to your spouse or civil partner if you die without tax penalties.

Here's a summary of the different types of ISAs with their key features and annual limits:

What is a savings account?

A savings account allows you to put away money you don’t need to spend right now and earn interest on it.

Some accounts will let you withdraw your money immediately, while others have restrictions on withdrawals. 

Here are the three main types you’ll encounter:  

• Easy access accounts: You can withdraw your money at any time without paying a penalty. Interest rates aren’t usually fixed, so they can change.  

• Fixed-term accounts: This type of account lets you put money away for a set period of time and pays a fixed rate of interest. There may be restrictions on how you access your money. 

• Limited access savings accounts: These accounts usually offer a higher interest rate, however, there may be restrictions on how you access your money such as limited yearly withdrawals.

One advantage of savings accounts is there’s no annual limit on how much you put in. 

While you don’t get the high tax-free threshold of an ISA, basic-rate taxpayers can use their personal savings allowance (PSA) to earn up to £1,000 a year in interest without paying tax.

Higher rate taxpayers can earn up to £500 each year, while additional rate taxpayers don’t get an allowance.  

In the 2025 Autumn Budget, it was announced that tax on savings interest held outside an ISA will rise by 2% from April 2027.

Savings accounts offer flexibility when it comes to accessing your money, which can be useful in an emergency.  

ISAs vs savings accounts: what are the risks? 

There’s some level of risk with stocks and shares ISAs, including your money losing value through inflation, fluctuations in the market lowering your portfolio’s value and potential loss of your capital if companies that you invest in become insolvent.

With a cash ISA, the main risk is that your interest rate might not beat inflation, so your money will lose value over time. If the provider of your cash ISA goes bust, your money is protected up to the first £85,000.

Learn more: SIPP vs ISA: which one should you choose?

Can you have an ISA and a savings account? 

Yes, you can. If you have the funds, you could put money into an easy-access savings account while gaining tax-free benefits from an ISA. 

Whether an ISA or a savings account is the best option depends on your individual needs and lifestyle.

Consider how much you want to save, if instant access is a priority and whether an ISA can shelter you from unnecessary tax.  

If you’re unsure, it’s worth talking to a financial adviser.

Quick decision guide: ISA vs savings account

Ask yourself these questions to see which might be the better fit for your money:

💰 How much do you plan to save each year?

• If your planned savings won't generate over £1,000 in interest a year (for a basic-rate taxpayer) or £500 (higher-rate taxpayer), a savings account may be enough, since your personal savings allowance covers this.

• If your interest is expected to be over £500 or more than £1,000, an ISA could help you avoid tax on interest or growth.

🕒 Do you need instant access to your money?

• Yes: An easy-access savings account offers flexibility.

• No: A cash ISA or fixed-term account may be suitable.

📈 Are you comfortable with investment risk?

• Yes: A stocks and shares ISA could provide higher long-term growth.

• No: A cash ISA or savings account is safer.

🎯 What’s your financial goal?

• Short-term savings (holidays, emergencies): Savings account.

• Long-term growth (retirement, house deposit): ISA (cash, stocks and shares, or a lifetime ISA).

Get expert financial advice

Both ISAs and savings accounts offer valuable ways to manage and grow your money, each with distinct benefits and limitations.

ISAs provide tax-free advantages and are suitable for larger savings, while savings accounts offer flexibility and accessibility.

Understanding these differences can help you make an informed decision based on your financial goals and needs.

Whether you choose an ISA, a savings account, or a combination of both, aligning your choice with your personal financial strategy is key to achieving your savings objectives.

Let Unbiased match you with a financial adviser for expert financial advice to help you navigate the benefits and options of ISAs and savings accounts so that you can make the most of your financial planning.