Is it better to save in an ISA or a normal savings account?

Full answer

Whether an ISA or a normal (non-ISA) savings account makes more sense depends heavily on how much you are saving, your tax band, and how long you plan to keep the money invested. A Cash ISA (or a Stocks and Shares ISA, for investment rather than cash savings) shelters all interest, dividends and capital gains earned within it from tax entirely, for as long as the money remains in the ISA wrapper, with no time limit on this protection, subject to a £20,000 total annual contribution limit across all types of ISA combined for any individual. A normal savings account, by contrast, only benefits from the Personal Savings Allowance -- up to £1,000 of interest a year tax-free for basic-rate taxpayers, £500 for higher-rate taxpayers, and none at all for additional-rate taxpayers -- with any interest above that specific allowance taxed at the saver's marginal Income Tax rate. For a basic-rate taxpayer with modest total savings, where the interest earned across all non-ISA accounts is likely to stay below £1,000 a year, a normal savings account may pay a similar or occasionally slightly better rate than an equivalent ISA without triggering any tax at all, making the ISA's tax shelter somewhat less critical in that specific situation. However, as interest rates rise, savings balances grow, or the saver moves into a higher tax band, the value of an ISA's unlimited, permanent tax shelter increases substantially, since a higher-rate or additional-rate taxpayer with significant savings could otherwise lose a meaningful proportion of their interest to tax every single year indefinitely. Because the £20,000 ISA allowance does not carry forward if unused, many financial advisers recommend using at least some ISA allowance every tax year as a matter of routine, even for savers who are not yet close to breaching their Personal Savings Allowance.

More answers

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