Savings accounts offer you an interest rate for depositing your money. You'll receive an interest payment monthly or annually and the interest you receive is paid without any tax deducted (gross).
Although the interest on savings accounts is paid gross, you may have to pay tax on the interest you receive if you've exceeded any Personal Savings Allowance that you have. For more information on the Personal Savings Allowance Click here.
Individual Savings Accounts (ISAs) were introduced by the government as a tax efficient way of saving or investing. The favourable tax treatment of ISAs may change in the future.
There’s a limit on the amount you can pay into ISAs each tax year. For the 2019/20 tax year the limit is £20,000.
There are 4 types of ISAs - cash ISA; stocks and shares ISA; innovative finance ISA and lifetime ISA. You can only pay your ISA limit into one of each type of ISA in the tax year. Your ISA limit can be paid into any combination of the types of ISAs.
Santander offer cash ISAs and stocks and shares ISAs. Currently Santander do not offer innovative finance ISA and lifetime ISA.
A cash ISA is an ISA based on cash saved in an account. With cash ISAs you don’t have to pay tax on the interest you earn. Just like Savings accounts, there are different types of cash ISAs.
- A variable rate cash ISA pays a variable rate of interest where the interest rate can go up or down, but you can access your money at any time.
- A fixed rate cash ISA pays a fixed rate of interest where you know what interest rate you’ll earn and for how long. Early access to your money is subject to a penalty.
A Help to Buy: ISA is a type of cash ISA specifically for people buying their first home. As well as earning interest on your savings, the account can also pay a Government bonus.
With a Help to Buy: ISA you can save £1,200 in the first month and £200 per month thereafter.
You can only pay in up to your annual ISA limit into one cash ISA per tax year so you have to choose which one is right for you.
For example, with Santander:
You could put £10,000 into a 2 Year Fixed Rate ISA, but then you can’t put any money into another cash ISA in the same tax year.
Or you could set up a Help to Buy: ISA and put your £1,200 initial deposit in and set up a £200 regular standing order for each further month, but then you can’t put any money into another cash ISA in the same tax year.
A stocks and shares ISA is a tax efficient way of investing as you don’t pay tax on any income or capital gains from the investment. Investing is a form of saving with the potential to provide greater returns than typical savings accounts, however, all investments carry risk to your capital which varies depending on the type of investment and should be held for at least 5 years.
You can pay into one of each type of ISA in the same tax year. For example, with Santander:
You could pay £10,000 into a cash ISA and £10,000 into a stocks and shares ISA.
Or you could pay £20,000 into a cash ISA, but then you couldn't pay any money into a stocks and shares ISA.
Or you could pay £20,000 into a stocks and shares ISA, but then you couldn’t pay any money into a cash ISA.
As well as putting new money into an ISA, you’re allowed to transfer some or all of the balance between ISAs or providers.
It's important to remember to arrange to transfer money between ISAs as an ISA transfer. If you move money between ISAs by withdrawing instead of arranging as a transfer the money will lose its ISA status and if replaced back into the ISA will count towards your current tax year ISA limit.