Is ISA Better Than Savings? What Type of ISA Is the Best?


  • The deposits in ISA are exempt from tax on its return, subject to an annual limit.
  • Savings Account offers different types of interest rates depending upon your financial need and saving style.

Individual Savings Account (ISA) is a kind of tax-free savings account, offered to the residents of the United Kingdom. The deposits in ISA are exempt from tax on its return, subject to an annual limit.

For the current tax year, the annual grant is £20,000, collectively across all the ISAs type. However, this limit cannot be carried forward from the current year to next year. One can open only a single account of any one type of ISA per tax year. For example, a person cannot open two Cash ISAs in the same year.

What is a Savings Account?

Keeping your money safely aside is known as savings. Saving accounts are the most traditional way to save your money. There are several types of saving accounts in offer, depending upon your financial needs, such as:

Instant-access savings account- It’s an account where you can make a deposit or withdraw money anytime. This type of account act as an emergency fund and hence generate the least interest income. Even then, they are quite popular among people due to easy accessibility.

A Regular Saving Account offers a comparatively high interest rate from Instant-access saving account, but you need to be committed to save monthly to open one.

Fixed Rate Bond is suitable for the investors looking to make a lump-sum deposit to keep it for a fixed duration, as these accounts have a lock-in period; therefore, one cannot withdraw before the end of the bond duration.

Which is Better ISA or Saving account?

  1. Tax Accountability: ISAs pay interest that is tax-free. Whereas in the case of Saving Accounts, you will have to pay tax on the interest earned over and above a certain limit.

For basic taxpayer: Interest earned up to £1,000 is tax-free.

For higher taxpayer: Interest earned up to £500 is tax-free.

  1. Upper Limit: In case of ISAs, an investor is allowed to save tax on their investment of up to £20,000 per tax year only.

Although, Saving Accounts offer a wide range of account depending upon the financial need and saving style, an ISA may be a good option if you are looking for long-term savings plan as all your earnings will be completely tax-free

Types of ISAs?

There are 4 types of ISA to choose from. Each ISA has its own set of benefits.

Cash ISAs: The Cash ISA works in a similar manner as a normal Saving Account. However, in this case, you will get tax free interest.

Stocks and shares ISAs: This type of ISA helps you to invest in the stock market without paying Capital Gain Tax. Through this ISA, you can invest in shares of the companies, government and corporate bonds and investment funds.

Innovative finance ISAs: This includes peer-to-peer lending of money. Once the investor who is ready to lend his money meets the one who need the money, financing is completed.

Lifetime ISAs: One can open this type of Individual savings Account if he or she is of age 18-44. Lifetime ISA intends to help you in buying your first home or save you for your retirement. The government supports you through this ISA and add 25% to your savings up to £1,000 per year in your account until the investor turns 50.

Suppose if you have deposited £3,000 as your saving in one financial year, the government will add £750 to your Lifetime ISA.

Which one to Choose?

The choice lies completely with the investors that with which type of ISA they would like to go ahead; however, they can also spread their allowance between different types of ISAs.

For an investor who is looking to invest in the stock market, Stocks and Shares ISA would be one that will probably suit them. Here one can select stocks and create his or her own portfolio of stocks.

On the other hand, if the investor is saving to buy his home or for its retirement, he or she can go for Lifetime ISA.