If your goal is to save money, you'll need to decide where to keep your savings.
Two options are Individual Savings Accounts (ISAs) and savings accounts.
While both could help your money grow, picking the right one (or a combination of both) for your circumstances can help ensure your money grows as fast as possible.
What is an ISA?
ISAs are a tax-efficient way to save money. The government sets a limit for how much can be saved each financial year, and doesn't charge any tax on the interest/income you earn. In the 2021/2022 tax year, this limit is £20,000. There are several types of ISAs including:
- cash ISAs – these are like ordinary savings accounts, except interest on your savings is protected from tax
- stocks and shares ISAs – these protect various types of investment income from tax
Some ISAs have certain conditions and bonuses that can help speed up your saving.
What is a savings account?
You can use a savings account to put away money you don't immediately need in order to earn interest. Depending on your circumstances, you may be charged tax on the interest earned. Some accounts may also have restrictions on making withdrawals.
You can withdraw your money whenever you like without paying a penalty. The interest on these accounts is usually not fixed, so banks may alter the interest rate.
You can put your money away for a set period of time and will earn a fixed rate of interest, but there may be restrictions on how you can access your money.
You can contribute money each month up to a certain limit. These accounts usually offer a slightly higher interest rate than ordinary savings accounts, but there may be restrictions on how you access the money.
What ISAs can offer
If you’re saving an amount up to £20,000, an ISA offers you a tax-efficient way to save.
The value of an ISA can also be passed on to your spouse, or civil partner, tax-efficiently if you pass away. This isn't the case with an ordinary savings account.
What savings accounts can offer
There's no annual limit on how much you can put into savings accounts.
With your Personal Savings Allowance (PSA), you can:
- earn up to £1,000 a year in interest on savings without being charged tax if you're a basic rate taxpayer
- earn up to £500 a year without being charged tax if you're a higher rate tax payer
However, this depends on your individual circumstances and may be subject to change in future. Additional rate taxpayers do not qualify for a PSA.
Some savings accounts can also offer more flexibility in accessing your money. This can be helpful if you’re not comfortable locking away your money for a set period.
The value of any tax benefits described depends on your individual circumstances. Tax rules may change in the future.