Saving money is an important part of financial planning, whether you’re working towards specific savings goals or just setting money aside for the future. Two common options are Individual Savings Accounts (ISAs) and regular savings accounts. Both help you save or invest money, but with different rules around tax, access, and contributions.
In this guide, we’ll explain some of the key differences between ISAs and savings accounts, including how each works, how they’re taxed, and how flexible they can be. We’ll also explain some of the main factors for you to consider when choosing between them.
This information is for general guidance only and does not constitute personal financial advice. Whether an ISA is suitable depends on your individual circumstances. Tax treatment depends on individual circumstances and tax rules may be subject to change in the future.
What is an ISA?
An Individual Savings Account (ISA) is a type of account that allows you to save or invest money in a tax‑efficient way.
Under current rules, you don’t pay interest on money earned from a Cash ISA, or pay income tax or capital gains tax on any income or potential growth from investments held within an investment ISA. This can help give your money the potential to grow without being reduced by certain taxes.
The tax benefits of an ISA depend on individual circumstances and current legislation, which may change. ISAs being referred to as ‘tax- free’ means that any returns generated inside the account are not subject to UK income tax or capital gains tax, as long as the rules are followed.
What is a savings account?
A savings account is a type of bank account designed to help you set aside money and earn interest over time. It can be used for short‑term or long‑term saving, depending on your needs and the type of account you choose.
Savings accounts might allow more flexible access to your money in comparison to some ISAs, although certain savings accounts have restrictions or fixed terms which mean you can only withdraw money after a certain period.
Interest earned in a saving account can build over time. In some cases you might benefit from compound interest, where interest is earned on both your original savings and any interest already added.
Are there different types of ISA?
There are several types of ISA designed to support different ways of saving or investing. While they all offer tax‑efficient benefits under current rules, the features, level of access and level of risk can vary depending on the type you choose.
Cash ISAs
A Cash ISA is a savings account which allows you to deposit money and earn tax-free interest on your savings. Interest earned in a Cash ISA is completely tax-free up to the annual ISA allowance, which can be beneficial for savers who exceed their Personal Savings Allowance.
The annual limit for contributions to a Cash ISA is currently set at £20,000, which resets in April at the beginning of each new tax year.
These accounts are often used for short to medium‑term savings, and access can vary depending on whether the ISA is easy access or fixed term.
Scottish Friendly does not provide Cash ISAs.
Stocks and Shares ISAs
A Stocks and Shares ISA allows you to invest in assets such as funds, shares and bonds. The value of a Stocks and Shares ISA is dependent on the performance of the underlying investments, but any income or potential growth from these investments is free from UK income tax and capital gains tax up to the annual limit of £20,000.
As you give your money access to the stock market, there may be more growth potential with a Stocks and Shares ISA than in a Cash ISA, however, the value of investments can go down as well as up, returns are not guaranteed, and tax rules can change.
Scottish Friendly specialises in providing Stocks & Shares ISAs.
Lifetime ISAs
A Lifetime ISA (LISA) is a government-backed savings account created to support qualifying individuals aged 18-39 save towards a first home or later life.
LISAs come with their own contribution limits and rules. An individual can contribute up to £4,000 each year in total, and there is a government bonus of 25% on deposits, up to a yearly maximum of £1,000 – this means if you contribute £4,000 to your ISA, the government will add £1,000 on top.
Money in a LISA can be used either to buy a first home or be taken later in life for retirement, however withdrawals for other reasons will typically incur a government withdrawal charge.
Scottish Friendly does not provide Lifetime ISAs.
Innovative finance ISAs
An Innovative Finance ISA allows you to invest in alternative assets like peer‑to‑peer loans, where your money is lent to individuals or businesses. Any potential returns are tax‑free under current rules, but these investments can carry higher risk and are not always protected in the same way as cash savings.
Your capital is not guaranteed, and returns depend on borrowers repaying their loans, meaning you could get back less than you invest. There is a risk you could lose all of your capital.
Innovative Finance ISAs are generally considered suitable for experienced investors who are comfortable with investment risk.
Scottish Friendly does not provide Innovative Finance ISAs.
You must be 18 or over to open a Cash ISA, Stocks and Shares ISA, or Innovative Finance ISA, as the minimum age for Cash ISAs was raised from 16 to 18 as of April 2024.
Are there different types of savings account?
While most savings accounts allow you to deposit money and earn interest, savings accounts can come in various forms, including easy access accounts, fixed-rate bonds, and regular saver accounts, each designed to meet different savings goals.
Regular savings account
A regular savings account - sometimes called a monthly savings account - is designed to encourage people to save money consistently each month in pursuit of their savings goals.
Regular savings accounts may not have minimum or maximum deposit limits, but this will depend on the provider you're dealing with and the terms and conditions of the savings account you've set up.
Regular saver accounts can require fixed monthly deposits and may offer higher interest rates than easy access accounts to encourage consistent saving habits.
Easy access or instant access accounts
Easy access savings accounts allow you to deposit and withdraw funds without penalties, which can make them more suitable for short-term savings needs.
Interest rates on these accounts are usually variable, meaning they can change over time, and in some cases may be lower than accounts with more restrictions around access to funds.
Fixed term/fixed rate accounts
Fixed term savings accounts - also referred to as fixed rate bonds or fixed term deposits - require you to leave your money untouched for a set period, often between one and five years.
In return, they may offer a fixed rate of savings interest for the duration of the term. As the name suggests, access to your money will be restricted if you choose this type of account and withdrawing money early may result in a charge or loss of interest, depending on the account terms.
Children's savings account
A children’s savings account is designed specifically for those under 18. Opening a children’s savings account allows parents or guardians to save on behalf of a child. Because of the intended audience, they typically come with features tailored to longer‑term saving.
Unlike Junior ISAs, you might be charged tax on interest accrued within a child’s savings account, depending on their circumstances and current tax rules.
Some key differences between ISAs and savings accounts
ISAs and savings accounts can both help you build up money over time, but they differ in how they’re structured, how they’re taxed, and how flexible they are. Understanding these differences can help you compare each option and decide which might be best for you.
Account features
ISAs
ISAs are designed to be tax‑efficient ways to save or invest. Within an ISA, any interest, income, or growth is completely tax-free within a certain limit, which is set by the government each year. The current tax-free allowance for the 2026/2027 tax year is £20,000.
Different types of ISA are available, including cash and investment options, allowing a degree of flexibility around how your money is held.
Savings accounts
Savings accounts can be simpler in the way they are constructed and focus on holding cash and earning interest. You can either deposit lump sums or contribute regularly, depending on your circumstances.
Savings accounts don’t have the same tax‑free benefits as ISAs, but they may offer more straightforward access to the money being held.
Interest rate
ISAs
One of the key features of an ISA is that your money won’t be subject to tax on the interest accrued or returns made within the account.
With a Cash ISA, this means the ISA interest you earn is yours to keep, as long as you stay within the annual allowance. Fixed Rate Cash ISAs offer a guaranteed interest rate, but typically require you to lock in your money for a set period.
With investment ISAs, returns depend on market performance rather than a guaranteed rate, although some providers do offer investment guarantees. 'If your portfolio performs well, there won't be any tax on returns [from money invested up to the £20,000 annual allowance].
Savings accounts
With savings accounts, you can earn money via interest accrued from your account balance, and the level of interest rate will depend on the type of account you have.
Some accounts offer higher interest rates but come with more restrictions, like restricting access or requiring regular savers to make monthly payments. Others might be more flexible, but offer a lower rate of interest overall.
ISA allowance vs Personal Savings Allowance
ISAs
ISAs are tax-free accounts, meaning you won't pay tax on the interest or returns your money makes, while interest from normal savings accounts may be taxable depending on your income tax band and Personal Savings Allowance (PSA).
For the current tax year, the ISA allowance is £20,000, which is the maximum amount you can save in ISAs without incurring tax. Savings accounts typically do not have a maximum deposit limit but may have specific limits set by individual providers.
This allowance resets on the 6th April, and if you don’t use the full amount each year, you lose it. That said, money saved from previous tax years will be safe within your ISA and will continue to benefit from tax‑free treatment.
Savings accounts
Traditional savings accounts are subject to the Personal Savings Allowance (PSA), which limits how much interest you can earn tax-free, based on your income.
The Personal Savings Allowance allows basic rate taxpayers to earn up to £1,000 in interest tax-free, while higher rate taxpayers have a PSA of £500, and additional rate taxpayers do not have a PSA.
It’s important to note that the personal allowance applies to everyone in the UK and is separate from the ISA allowance, which only applies to ISA holders.
Access to funds
ISAs
Access to money within an ISA depends on the type of ISA you have. Some ISAs, like easy access Cash ISAs, are more flexible around withdrawals, while others – like Stocks and Shares ISAs – are more suited to longer-term saving.
If you pay into a Junior ISA for your child, for example, they won’t be able to access funds until they’re 18. As a parent or guardian you can set up the account but you can’t withdraw money; the funds held in a Junior ISA belong to the child.
Savings accounts
Many non‑ISA savings accounts offer flexible access and unlimited withdrawals, although this depends on the specific account. Some savings accounts include withdrawal limits or require notice, while other savings accounts which are fixed‑term may charge for early access to money.
There are a wide range of options across account types and providers which all have their own specific rules, so you should choose the one that fits best with your circumstances and financial goals.
Savings term
ISAs
ISAs can be used for both medium and long‑term saving and there is no specific savings term for adult ISAs. You might choose to use an ISA for a particular savings goal and plan to withdraw after a set period, or maybe you prefer to keep your money invested long-term.
As long as you stay within the rules, your money can sit in an ISA indefinitely and continue to benefit from tax advantages.
Savings accounts
Whether there’s a fixed term applied to your savings account, depends on the type of account you have, as well as the provider. Some accounts are easy-access, allowing you to make deposits and withdrawals as you please.
Other accounts require you to lock your money away for a set period and offer a guaranteed interest rate; in that scenario, the level of interest earned is directly related to how long you’re willing to commit your money.
Transferring to different providers
ISAs
If your appetite for risk or your long-term goals change, or you discover an account with better interest rates, you can transfer existing ISAs to new providers.
ISA holders can have multiple accounts and may choose to transfer to another provider to take advantage of a different offer, potential benefit, or to open a different type of ISA.
It’s possible to transfer the same type of ISA (from one Cash ISA to another Cash ISA), or different types of ISA (from a Cash ISA to a Stocks and Shares ISA). The type of ISA that’s best for you will depend on your goals, but it’s important to closely follow your providers’ ISA transfer process to avoid losing any tax benefits.
Transfer an ISA to Scottish Friendly
Savings accounts
Because there isn’t the same level of tax implications, switching savings account provider is typically more straightforward and less formal than transferring an ISA.
Savings accounts can normally be transferred by withdrawing your money and moving to another provider, although certain terms and conditions might apply depending on your particular account.
Junior ISA vs savings account for child
A Junior ISA and a child’s savings account are both useful ways to save money for a child, but they work differently. A Junior ISA allows savings to grow and earn tax‑free interest up to an annual limit of £9,000, whereas the tax treatment of money in a standard savings account will depend on the type of account you choose.
Unlike easy access ISAs or standard savings accounts, money in a Junior ISA is locked in. Funds belong to the child and can only be accessed by them when they turn 18.
By comparison, some savings accounts may allow earlier access, depending on the account terms. The choice between them might depend on whether flexibility or long‑term saving is the priority.
Scottish Friendly is an award-winning Junior ISA provider. Investment Life & Pensions Moneyfacts Awards 'Best Junior ISA provider' 2019-2025.
How do I know which savings option is right for me?
Deciding between an ISA and a savings account often depends on your financial goal, how long you plan to save, and how you want to access your money. ISAs allow you to save tax‑free under current rules, while savings accounts may offer more flexibility depending on the type you choose.
Different accounts offer different features; ISAs come with an annual limit, while savings accounts may not. The tax treatment always depends on individual circumstances, including your income and how much interest you earn.
If you’re unsure which option is best for you, it may be a good idea to speak to an independent financial adviser.
Some key takeaways
ISAs offer tax‑efficient returns, while savings accounts may be subject to tax depending on your Personal Savings Allowance.
The ISA allowance (£20,000 for 2026/27) limits how much you can contribute tax‑efficiently each year, whereas savings accounts may not have a set limit.
Savings accounts can provide easier access to your money, though some ISAs can also offer flexible access.
Investment ISAs offer growth potential but carry an element of risk, while Cash ISAs generally carry less risk but offer lower returns.
The right savings option depends on your goals, time horizon, access needs, and individual tax position.
Important information
The value of stock market investments can go down as well as up, so you or your child could get back less than you’ve paid in.
The funds paid into a Junior ISA belong to the child and can only be accessed by them when they turn 18.
Tax-Free means the investment grows free from tax, with the exception of any tax your provider has already paid on your behalf (for example on dividends from UK shares). Tax treatment depends on individual circumstances and may be subject to change in the future.
This information is for general guidance only and does not constitute personal financial advice.
Scottish Friendly does not provide financial advice. If you’re unsure whether an ISA or Junior ISA is suitable for your situation, you may want to speak to an independent financial adviser.