CMC Invest
18 November 2024
Key points
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Important: This article is for general guidance purposes only and should not be considered as financial advice. Tax treatment will depend on your individual circumstances and could potentially change in the future.
Firstly, it’s important to understand your personal savings allowance, which is the amount of interest you can earn in a normal savings account before you’re taxed.
If you’re a basic tax rate payer then it’ll be £1,000, while if you’re a higher rate payer, it’ll be £500. If you’re an additional rate payer, earning over £125,140 as of the 2024/25 tax year, then you don’t have an allowance.
Even if you don’t have enough savings to go over your personal savings allowance, opening a cash ISA could be tax efficient. This is because your allowance resets every year, enabling you to build yourself a tax-free nest egg. Learn more about personal savings allowance.
After a year of sitting at a 15-year high of 5.25%, the Bank of England’s (BoE) base rate is starting to fall. Should you put your hard-earned money in a cash ISA or a savings account? What’s the difference between the two? Here’s a handy table with a quick summary of what you need to know.
Cash ISA | Savings account | |
|---|---|---|
What tax do I pay? | None - you can put a maximum of £20,000 and any interest earned is tax-free. Note: you can open as many ISAs as you want, but it is your responsibility to make sure you don’t go over your £20,000 annual allowance. | Your personal savings allowance allows you to earn up to £1,000 interest tax-free if you are a basic rate taxpayer, £500 for higher rate taxpayers and £0 for additional rate taxpayers. If you earn interest over your personal savings allowance, then you will need to pay tax. |
How much do I have to deposit? | You can contribute up to £20,000 every tax year. Some cash ISAs have no minimum deposit, while others may require you to deposit anywhere from £1 to £1,000. | While there’s generally no limit to the amount or frequency you can deposit, some banks may require a certain minimum amount of funds for you to receive interest. Additionally, high-interest savings accounts typically have a maximum monthly deposit limit. |
How often can I withdraw my money? | Different cash ISA types have different stipulations. If yours is an easy access Cash ISA, then you’ll be able to withdraw as many times as you want. Though, bear in mind that only flexible ISAs allow you to take money out and deposit again in the same tax year without impacting your annual ISA allowance. If yours is a fixed rate ISA, then you won’t be able to withdraw till the end of the fixed terml. You’ll still be able to access your money, but this almost always requires you to close your account and be hit with an early closure charge. | Generally, there are no restrictions when it comes to how often you can withdraw. However, some accounts may only allow you to make one withdrawal a month, while other accounts may have penalties for withdrawing; for example, interest may not be paid for a set period after withdrawal. |
Anything else I should know? | You can choose to open a fixed rate cash ISA for between one year and five years. How long you want to lock your money away should factor in the forecast for inflation and the Bank of England’s (BOE) base rate. Easy access cash ISAs are variable, which means the interest will rise and fall depending on inflation and what the BoE does with the base rate. | Some savings accounts are variable, while others offer fixed-term interest rates that may vary in duration. |
To sum up, the main difference between cash ISAs and savings accounts is tax-efficiency. If you have savings or think you’ll earn enough savings that will earn more interest than your personal savings allowance, then saving with a cash ISA could be tax efficient.
However, choosing between a cash ISA and an ordinary savings account depends on your personal circumstances and financial goals. How much are you able to save? Do you need to dip into your savings in the short-term or are you happy to lock it away for the longer-term? As always, it’s important to do your research and consider what is best for your current situation.
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