Cash ISA or savings account: what’s the difference?

A Cash ISA or savings account both work in a similar way: you deposit cash and then earn interest. The main difference relates to tax: interest earned as part of a Cash ISA is 100% tax free, whereas interest from a standard savings account can be liable for tax.

This doesn’t mean that a Cash ISA is always the better option. If a savings account offers higher interest rates and you aren’t required to pay tax on the interest, it may be the better option for you.

What’s the key difference?

The biggest difference is that a Cash ISA gives you the benefit of 100% tax-free savings. In a savings account, your interest is taxed if it exceeds your PSA (Personal Savings Allowance). However, Cash ISA accounts are limited by an annual ISA allowance. This means you can only deposit up to £20,000 a year into a Cash ISA.

How do tax rules affect the choice?

The amount of tax that affects your savings in a regular savings account depends on your individual tax band. Basic rate taxpayers can earn up to £1,000 in annual interest, higher rate taxpayers up to £500 and additional rate taxpayers don’t have a personal savings allowance which means they pay tax on all the interest they earn from their savings. When deciding which account could suit you best, knowing which of these three categories you are in will help you decide how attractive the tax-free savings of a Cash ISA are when compared to a regular savings account.

How do access and withdrawal rules compare?

Easy access savings accounts will usually give you access to your money immediately and the transfer can be completed in just a few hours. Cash ISA transfers, however, are an official process which often requires paperwork and may take longer than a normal transfer.

Cash ISA transfers need to adhere to a legal process which will preserve the tax-free status of your savings. You should contact your provider who’ll assist with the transfer of any funds rather than being able to access your funds yourself. You should expect the process of an ISA transfer to take between 15 and 30 days.

What account conditions should you check?

When comparing Cash ISAs with savings accounts, try to look beyond the interest rate and consider as many of the account conditions as possible when deciding which account suits you best.

• AER/interest rate: is it fixed, variable or introductory?
• Access to funds: is the account instant access, notice period or fixed term?
• Withdrawal penalties or restrictions: are there limits on withdrawals?
• ISA flexibility: if it's a Cash ISA, can funds that have been withdrawn be replaced without using more ISA allowance?
• Deposit protection: are your funds covered by the FSCS?

Frequently asked questions

What should I know before deciding between a Cash ISA or savings account?

In addition to the current ISA allowance of up to £20,000 a year, there are several other ISA rules to be aware of.

• Cash ISAs are only available to UK tax residents.
• There’s currently no option to open a joint account ISA.
• Savings accounts often offer higher interest rates than Cash ISAs.

How should I compare accounts for a Cash ISA or savings account: what’s the difference?

When comparing a Cash ISA and a savings account, the biggest difference is that a Cash ISA gives you 100% tax-free savings. In a savings account, any interest you earn is taxed if it exceeds your PSA (Personal Savings Allowance). ISA accounts are however limited by an annual ISA allowance, meaning you can currently only deposit a maximum of £20,000 a year into Cash ISA accounts.

Where can I check the latest rules and product terms?

You can review the current and upcoming HMRC rules on their website here

Kent Reliance’s ISA page is also a great place to compare available products ISA page

Do savings accounts have higher interest rates than Cash ISAs?

Savings accounts generally do 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 earn you more overall than a Cash ISA.

Next steps

If you’re currently trying to choose between a Cash ISA and a savings account, these pages may help.

View Cash ISAs

View current interest rates

View all savings products

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