The cash ISA versus savings account debate is one of the most common questions in UK personal finance. The answer depends on how much you’re saving, what tax band you’re in, and how much interest you’re likely to earn. Here’s how to work it out.
What’s the difference?
Both accounts hold cash and pay interest — but a cash ISA shelters your interest from income tax. A regular savings account pays interest that counts towards your Personal Savings Allowance (PSA). Basic rate taxpayers get a £1,000 PSA; higher rate taxpayers get £500; additional rate taxpayers get nothing.
When a savings account wins
If you’re a basic rate taxpayer with under £20,000 in savings earning around 4–5% AER, you’ll earn roughly £800–£1,000 in interest per year — just within your PSA. In this case, you don’t need an ISA at all. Keep your savings in the highest-rate account you can find, regardless of ISA status.
When a cash ISA wins
If you’re a higher rate taxpayer with a £500 PSA, or if you have significant savings that generate more than your allowance in interest, an ISA makes sense. Every pound of interest inside an ISA is yours to keep — HMRC can’t touch it, now or in the future. And once you’ve sheltered money in an ISA, it stays sheltered year after year.
The ISA allowance in 2026
You can put up to £20,000 per tax year into ISAs. This allowance resets each April. You can split it across different ISA types — cash ISA, stocks and shares ISA, Lifetime ISA — but the total across all of them can’t exceed £20,000.
The smart approach for most people
Use your PSA first — fill a high-rate savings account up to the point where interest would exceed your allowance. Then use your ISA allowance for anything beyond that. This way you’re not sacrificing flexibility unnecessarily, and you’re still protecting larger savings from tax.
Tax rules can change. This article reflects the position as of the 2025–26 tax year. Always check current HMRC guidance or speak to a qualified adviser for personal tax advice.