ISAs vs bonds explained
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 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.
The other major difference is ISAs allow you to earn tax-free* interest**, but you don’t get that benefit with a bond.
How does an ISA work?
An ISA allows you to make the most of your annual ISA tax-free* savings’ allowance**. It works much like a standard savings account where you deposit funds and earn interest, but some ISA products have a deposit deadline, for example 30 November 2023 for an account with a fixed term until 1 December 2024.
Once you’ve deposited your money, the interest you earn on it will build up and will usually be paid annually, as long as you’ve stayed within your ISA limits. So make sure to read the terms and conditions of any Cash ISAs you open.
There are different types of Cash ISA available, such as fixed, variable or easy access, for various lengths of time.
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 them a good home for a lump-sum investment, 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 sometimes be used by two people.
The reason for this is because everyone has an ISA deposit limit each tax year. For 2024/25 the limit is £20,000. Any money deposited on top of this amount won’t earn tax-free* interest.
What's an ISA account?
An ISA is a savings account where you can earn tax-free* interest subject to various conditions. 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.
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). Depending on your tax bracket, your PSA can let you earn up to £1,000 of tax-free interest each year.
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 have as many open at the same time as you want, but you can only pay into one of each type per tax year. For example, you can only pay into one fixed rate Cash ISA, and one stocks and shares ISA, each tax year. Your ISA allowance of £20,000 (for the 2024/2025 tax year***) applies across all the ISAs you hold.
Is a fixed rate bond better than an ISA?
We can’t say what will be best for you - it all depends on your circumstances and your reasons for saving. ISAs offer the incentive of tax-free* savings, though this does have a limit of £20,000***, so if you have more money to deposit, it might be worth considering a bond. A fixed rate bond also might be better for you if you don’t want to access your money for a set amount of time, but you’ll have to pay tax on any interest above your PSA.
Take your time and look at the ins and outs of each product. If you'd like some help doing this, just get in touch.
*Tax-free means that interest payable is exempt from income tax
**The tax treatment depends on the individual circumstances of each customer and may be subject to change in the future
***Deposits in any tax year are subject to the limits set by HM Revenue and Customs (HMRC) and may therefore be subject to change.
This guide is intended as a summary only and does not constitute legal or financial advice given by Leeds Building Society. No reliance should be placed on this guide. We recommend that you seek independent legal advice and/or financial advice if you have any questions or queries.
Cash ISAs are available to individuals aged 18 or over who are resident in the UK for tax purposes.