ISA vs savings account: which is better? (2026/27)

Both ISAs and savings accounts can hold your money safely and earn interest — but they are taxed very differently. Choosing between them (or combining them) depends on how much interest you earn, what income tax rate you pay, and how much flexibility you need.

Not financial advice. Rates and allowances are from HMRC and gov.uk for 2026/27. Savings rates change frequently — 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) is taxable income. However, multiple allowances may mean you pay no tax on it:

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 the amount of savings interest you can receive each year without paying income tax on it. Only interest above your PSA is taxed.

Example (basic-rate taxpayer, £20,000 in a savings account at 4% AER):

• Annual interest: £800
• PSA: £1,000
• Tax due: £0 (interest is below the PSA)

The starting rate for savings

If your non-savings income (employment, self-employment, pension income) is below £17,570, you may also benefit from a starting rate band of up to £5,000 at 0% for savings interest. The band is reduced 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 − £2,000) | | £17,570 or more | £0 — band fully extinguished |

This mainly benefits people with low employment income but meaningful savings — retired early, part-time workers, or those just starting out.

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 do not use up your PSA, they do not push you into a higher tax band, and they do not appear on your Self Assessment return.

The ISA allowance for 2026/27 is £20,000 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 split your £20,000 across multiple types, but the combined total cannot exceed £20,000.

Note: The government has announced a £12,000 sub-limit on Cash ISA contributions for savers under 65, starting from 6 April 2027. This does not affect 2026/27.

Source: gov.uk/individual-savings-accounts.

3. When a savings account beats an ISA

An ordinary savings account may be the better choice if:

• Your total savings interest is below your PSA (£1,000 basic rate, £500 higher rate) — and likely to remain so. In this case, you pay no tax either way, but a non-ISA might offer a better rate.
• You want flexibility over the ISA allowance — some Cash ISAs restrict withdrawals; a savings account may offer easier access.
• You have already used your ISA allowance for the year — any additional savings must go into a standard account.

4. When an ISA beats a savings account

An ISA almost always wins for higher earners, larger pots, or long-term savers:

• Higher-rate taxpayers: your PSA is only £500 — with £10,000 earning 5%, you earn £500 in interest and immediately breach it. An ISA protects all of it.
• Additional-rate taxpayers: PSA = £0. All savings interest in a standard account is taxable at 45%. An ISA makes all interest tax-free.
• Large pots: even a basic-rate taxpayer earning more than £25,000 of interest at a 4% rate would breach the £1,000 PSA.
• Compounding over time: ISA gains and interest compound tax-free year after year. The longer the time horizon, the larger the advantage.
• 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, all gains are tax-free.

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 |

In this case, there is no difference in year 1. But if your pot grows to £30,000:

| | 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 |

The ISA saves £40 per year at this size. For a higher-rate taxpayer with PSA £500, the tax saving would be £280 (40% × £700 above PSA).

For a larger pot (e.g. £50,000 at 4% = £2,000 interest), a basic-rate taxpayer pays £200 in tax on the non-ISA account (20% on £1,000 above PSA); a higher-rate taxpayer pays £600 (40% on £1,500 above PSA).

6. ISA vs pension — a quick comparison

| | ISA | Pension | |---|---|---| | Upfront tax relief | No | Yes — relief 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 is typically more valuable than ISA flexibility — £100 into a pension costs only £60 net. But ISAs give you access to money before retirement age.

Many advisers suggest using both: ISA for accessible savings, pension for tax-efficient retirement income.

Related guides

• Pension tax relief explained — upfront relief makes pensions powerful for higher earners
• How is take-home pay calculated? — your income tax rate determines your PSA and how much you save with an ISA