Both ISAs and savings accounts will keep your money safe and pay you interest. Where they part ways is tax, and the gap can be significant. Which one suits you (or whether you use both) comes down to how much interest you earn, the income tax rate you pay, and how much flexibility you want.
Not financial advice. Rates and allowances are from HMRC and gov.uk for 2026/27. Savings rates move around a lot, so always check the current rate with your provider. Source: gov.uk/individual-savings-accounts.
1. How savings interest is taxed
Interest from ordinary savings accounts (not ISAs) counts as taxable income. That said, a stack of allowances can mean you hand over nothing in practice:
The Personal Savings Allowance (PSA)
| Income tax band | PSA 2026/27 |
|---|---|
| Basic rate (20%) | £1,000 |
| Higher rate (40%) | £500 |
| Additional rate (45%) | £0 |
The PSA is how much savings interest you can pocket each year without paying income tax on it. Only the interest above your PSA gets taxed.
Example: basic-rate taxpayer, £20,000 in a savings account at 4% AER.
| Step | Amount |
|---|---|
| Savings pot | £20,000 |
| Interest earned at 4% AER | £800 |
| Personal Savings Allowance (basic rate) | £1,000 |
| Interest above the PSA | £0 |
| Tax due | £0 |
The interest sits below the PSA, so nothing is owed.
The starting rate for savings
If your non-savings income (employment, self-employment, pension income) comes in below £17,570, you may also get a starting rate band of up to £5,000 at 0% on savings interest. That band drops by £1 for every £1 of non-savings income above £12,570.
| Non-savings income | Starting-rate band available |
|---|---|
| £12,570 or less | Full £5,000 |
| £14,570 | £3,000 (£5,000 minus £2,000) |
| £17,570 or more | £0, band fully extinguished |
It mostly helps people with low employment income but a decent pot of savings: the early-retired, part-timers, or those just getting going.
Source: gov.uk/apply-tax-free-interest-on-savings and LITRG guidance.
2. How ISAs work
Interest and gains inside an ISA are completely exempt from tax. They don't use up your PSA, they won't nudge you into a higher tax band, and they never show up on your Self Assessment return.
The ISA allowance for 2026/27 is £20,000 spread across all your ISAs:
| ISA type | 2026/27 allowance | Notes |
|---|---|---|
| Cash ISA | Up to £20,000 | Easy access or fixed-term |
| Stocks and Shares ISA | Up to £20,000 | Investment returns tax-free |
| Lifetime ISA (LISA) | Up to £4,000 (within £20k) | 25% government bonus; for first home or age 60+ |
| Junior ISA | £9,000 per child | Separate allowance |
| Innovative Finance ISA | Up to £20,000 | Peer-to-peer lending |
You can spread your £20,000 across different types, but the combined total can't go a penny over £20,000. Since 6 April 2024 you can also pay into more than one ISA of the same type in a single tax year (say, two different Cash ISAs), as long as the combined total stays within £20,000. The Lifetime ISA is the exception: still one per year.
Note: The government has confirmed a £12,000 Cash ISA limit for savers under 65 from 6 April 2027. Those aged 65 and over keep the full £20,000 in cash, and the overall £20,000 ISA allowance is unchanged. None of this touches 2026/27.
Source: gov.uk/individual-savings-accounts.
Free savings calculator
Compare ISA vs taxable savings
Enter your pot, interest rate and tax position to see how much tax you save with an ISA versus a standard savings account.
3. When a savings account beats an ISA
An ordinary savings account can be the smarter pick if:
- Your total savings interest sits below your PSA (£1,000 basic rate, £500 higher rate) and looks set to stay there. You pay no tax either way, and a non-ISA might pay a better headline rate.
- You want flexibility over the ISA allowance. Some Cash ISAs limit withdrawals, whereas a savings account can offer easier access.
- You've already used up your ISA allowance for the year, so any extra savings have to go into a standard account.
| Situation | Why a savings account can win |
|---|---|
| Interest stays below your PSA | £1,000 (basic rate) or £500 (higher rate) is tax-free anyway, and a non-ISA may pay a higher headline rate |
| You want easy access | Some Cash ISAs restrict or penalise withdrawals; standard accounts often don't |
| ISA allowance already used | Your £20,000 for 2026/27 is spent, so extra savings sit in a taxable account |
4. When an ISA beats a savings account
An ISA almost always comes out ahead for higher earners, bigger pots, or long-term savers:
- Higher-rate taxpayers: your PSA is only £500, so £15,000 earning 5% throws off £750 of interest and sails straight past it. An ISA shelters the lot.
- Additional-rate taxpayers: your PSA is £0. Every scrap of savings interest in a standard account is taxable at 45%, while an ISA keeps all of it tax-free.
- Large pots: even a basic-rate taxpayer with a pot above £25,000 at a 4% rate would clear the £1,000 PSA (£25,000 at 4% is exactly £1,000 of interest).
- Compounding over time: ISA gains and interest compound tax-free year after year, and the longer the horizon, the bigger the head start.
- Stocks and Shares ISA: capital gains in a standard investment account are taxable (above the CGT annual exempt amount of £3,000 in 2026/27). Inside an S&S ISA, every gain is tax-free.
The bigger your tax rate, the more an ISA saves. Take a £30,000 pot at 5% (£1,500 of interest) and watch the tax bill on a standard account climb with your rate, while the ISA stays at zero:
| Taxpayer (£30,000 at 5% = £1,500 interest) | PSA | Interest above PSA | Tax on savings account | Tax in a Cash ISA |
|---|---|---|---|---|
| Basic rate (20%) | £1,000 | £500 | £100 | £0 |
| Higher rate (40%) | £500 | £1,000 | £400 | £0 |
| Additional rate (45%) | £0 | £1,500 | £675 | £0 |
5. Worked example
Scenario: £20,000 in savings, 4% AER, basic-rate taxpayer, full PSA available.
| Savings account | Cash ISA | |
|---|---|---|
| Annual interest | £800 | £800 |
| PSA | £1,000 | N/A, ISA is always tax-free |
| Tax on interest | £0 (below PSA) | £0 |
| Year 1 net interest | £800 | £800 |
So in year 1 there's nothing in it. Let your pot grow to £30,000, though, and the gap opens up:
| Savings account (£30k, 4%) | Cash ISA (£30k, 4%) | |
|---|---|---|
| Annual interest | £1,200 | £1,200 |
| Tax at 20% on £200 (above PSA) | £40 | £0 |
| Net interest | £1,160 | £1,200 |
At this size the ISA saves you £40 a year. For a higher-rate taxpayer with a £500 PSA, the saving would be £280 (40% of the £700 above the PSA).
Scale up to a £50,000 pot at 4% (£2,000 of interest) and the gap widens again:
| £50,000 at 4% (£2,000 interest) | Interest above PSA | Tax on savings account | Tax in a Cash ISA | ISA saving |
|---|---|---|---|---|
| Basic-rate taxpayer (PSA £1,000) | £1,000 | £200 | £0 | £200 |
| Higher-rate taxpayer (PSA £500) | £1,500 | £600 | £0 | £600 |
Model your savings
Savings & ISA Calculator
Compound interest with regular contributions, comparing tax positions and ISA versus taxable account over your chosen time horizon.
6. ISA vs pension: a quick comparison
| ISA | Pension | |
|---|---|---|
| Upfront tax relief | No | Yes, at your marginal rate |
| Tax on withdrawal | No | Marginal rate on 75% of drawdown |
| Flexibility | Full, withdraw anytime | Locked until minimum pension age (57 from 2028) |
| Best for | Flexible savings, medium-term goals | Retirement income with tax relief |
| Annual limit | £20,000 | £60,000 (annual allowance) |
For higher-rate taxpayers, the upfront pension relief usually beats ISA flexibility: £100 into a pension costs just £60 net. The trade-off is access, since ISAs let you reach your money well before retirement age.
Plenty of advisers say use both: the ISA for money you can get at, the pension for tax-efficient retirement income.
Related guides
- Pension tax relief explained: upfront relief makes pensions a heavy hitter for higher earners
- How is take-home pay calculated?: your income tax rate sets your PSA and how much an ISA saves you