ISA’s and Savings accounts may seem similar at first, however despite any similarity that there may seem, they are two accounts that can be very different in both their purpose and use.
First of all, an ISA is a tax-free way of saving money, with the current limit set for cash at £5,340 and stocks and shares at £10,680, which can give a tax-free advantage to investments, which would normally fall under the realm of Capital Gains tax and PAYE for smaller investments. The main difference is that if the £5,340 is already invested and you need to take some out, there is no way of being able to place this back in until the next tax year, effectively removing the tax-free balance.
The simple strategy to use on this is to place emergency money into a high-rate standard savings account, and what you’re unlikely to need in an ISA, therefore in many cases not losing the balance if you do have additional finds at the end of the year. This can give you a saving of 20% tax on any interest that is earned during this time.
ISA’s also have a subscription of one per year, and in many cases it’s easiest and offers higher rates of interest to transfer everything into one bank. Whereas many prudent investors will change their subscription each year to another account allowing transfers in, to have two ISA’s opened in the same tax year is against the law. You can’t fill the £5,340 in one bank and then place another £5,340 into another, and it’s not normally possible to change the subscription to a different bank within the same tax year, which can mean that one serious problem means that you will still be stuck with the bank until April.
For those with high rates of savings, it is also worth bearing in mind that it may be best to keep 2 banks as to be covered under the FSCS scheme, which allows £85,000 compensation if the bank is unable to meet financial stability obligations. This is per registered body, not per account, and a list of eligible bodies, taking into account mergers can be found here. This can get quite confusing, as RBS and Natwest are owned by the same group, but count as two separate banks, whereas Santander is registered under the same body as Abbey National and Bradford and Bingley.