Published: 15 January 2025
You’ve probably seen the terms ‘ISA’ and ‘bond’ when looking at savings accounts. But do you know the difference between the two types of account? Read on to find out.
What's the difference between a bond and an ISA?
They’re both ways to put money aside for whatever you’re saving for. But the main difference is that with an Individual Savings Account (ISA) you can save tax-free. You can also access your money if you need to, though this can come with a loss of interest. With a bond, you’re locking away your money and won’t be able to access it for a fixed amount of time.
How does a Cash ISA work?
An ISA allows you to use your annual ISA tax-free savings allowance. It works much like a standard savings account where you deposit funds and earn interest. You need to be 18 or over and a UK resident.
Once you’ve deposited your money, the interest you earn on it will build up and will usually be paid annually. You can have a Fixed Rate Cash ISA that has a set interest rate for a period of time or a variable rate Cash ISA, so make sure to read the terms and conditions of any Cash ISAs you open.
At the moment, Cash ISAs are the only type of ISA we provide.
What's a fixed rate bond?
The concept of a fixed rate bond is simple – put aside your money for a set amount of time and, in return, you'll get a fixed interest rate on your savings. This could make it a good home for a lump-sum, where you can sit back and watch your funds build up.
What does ISA stand for?
It stands for Individual Savings Account. Cash ISAs, as well as other ISA types, can only be opened and operated by a single person, unlike other savings accounts which can usually be opened for more than one person.
Everyone has an ISA allowance for each tax year. For 2024/25 the limit is £20,000.
What's an ISA account?
It gives you the opportunity to make the most of your annual ISA tax-free savings allowance. There are different types of Cash ISA to suit different savings goals. The way they work can change depending on which ISA product you choose, but the interest you earn will be tax-free.
Is a fixed rate bond tax-free?
Fixed rate bonds aren't tax-free.
You’ll pay tax on any interest above your Personal Savings Allowance (PSA).
If you’re a basic-rate taxpayer, you can earn up to £1,000 of interest before having to pay tax. Higher-rate taxpayers earn up to £500 and additional rate taxpayers don't receive any allowance, so will pay tax on all interest they earn.
Can you have a bond and an ISA?
Yes, you can have as many bonds and ISAs as you need.
You can have multiple fixed rate bonds. Each bond will have a maximum operating balance; for our bonds that’s £1,000,000 (£2,000,000 for joint accounts).
When it comes to ISAs, you can open and pay into multiple ISAs of the same type in the same tax year. However, you can't pay in more than your annual £20,000 ISA allowance overall.
Is a fixed rate bond better than an ISA?
It all depends on your circumstances and your reasons for saving. Consider how much you have to save, when you need to access your money and how you want to get the most from your tax-free allowance. Take your time and look at the ins and outs of each product.
The tax treatment depends on the individual circumstances of each customer and may be subject to change in the future
This article is not advice and you should seek independent financial or legal advice if needed.
