ISA or savings account: which is better?
A taxable savings account can be just as good as a Cash ISA for as long as your interest stays inside your Personal Savings Allowance and, for some savers, the starting rate for savings. Once your interest grows past that, the ISA's tax-free wrapper starts to matter.
The short answer
- Basic-rate taxpayers can earn £1,000 of interest tax-free outside an ISA. Higher-rate taxpayers get £500. Additional-rate taxpayers get £0.
- Some low earners can also use the starting rate for savings, worth up to £5,000 of interest at 0%, on top of any unused personal allowance.
- From 6 April 2027, tax on savings interest outside an ISA rises 2 points at every band: 22% basic, 42% higher, 47% additional.
- An ISA never taxes interest, however large your balance grows. A taxable account starts costing you the moment your interest crosses your allowance.
When can a savings account actually beat a Cash ISA?
When your interest fits comfortably inside your Personal Savings Allowance, and, if you qualify, the starting rate for savings on top of it, a taxable account can perform exactly the same as a Cash ISA after tax, because no tax is actually due either way. Whether it does beat an ISA in practice then comes down to which product pays the better rate, which changes constantly and is not something to settle here. What is fixed, and worth understanding properly, is where the tax-free line actually sits.
What is the Personal Savings Allowance?
Personal Savings Allowance, 2026/27
- Basic-rate taxpayer
- £1,000
- Higher-rate taxpayer
- £500
- Additional-rate taxpayer
- £0
This allowance sits on top of your normal personal allowance and applies specifically to interest, whether from a bank account, a building society, or most other taxable savings. It is not something you claim: your bank reports interest to HMRC, and tax due above your allowance is usually collected automatically, often through a PAYE tax code adjustment.
What is the starting rate for savings?
Separately from the Personal Savings Allowance, you can earn up to £5,000 of interest at 0% under the starting rate for savings, if your other income, everything except savings interest, is below £17,570. That figure is your personal allowance of £12,570 plus the £5,000 band, and the available amount tapers pound for pound as other income rises through that range, reaching £0 once other income hits £17,570.
This mostly helps people with modest earnings, part-time workers, or retirees whose main income is a state pension and not much else, where a meaningful chunk of savings interest can end up entirely tax free even outside an ISA.
What counts as savings income for this?
The Personal Savings Allowance and the starting rate for savings apply to interest, mainly from banks, building societies and similar accounts, plus some interest from corporate and government bonds held outside an ISA. They do not apply to dividends from shares or funds, which have their own separate £500 dividend allowance and their own tax rates. If you hold a mix of interest-paying accounts and dividend-paying investments outside an ISA, you are working with two different allowances, not one combined figure, and each needs checking on its own terms.
Worked examples at each tax band
Tax treatment depends on your circumstances and may change. These examples use round interest figures to show the mechanics, not any particular account’s rate.
A basic-rate taxpayer with £1,300 of interest in the year. The first £1,000 is covered by the Personal Savings Allowance. The remaining £300 is taxed at 20% today, £60, rising to 22% from 6 April 2027, £66.
A higher-rate taxpayer with £1,300 of interest. The allowance here is £500, leaving £800 taxable. At 40% today that is £320 in tax, rising to 42% from 2027, £336.
An additional-rate taxpayer with £2,500 of interest. There is no Personal Savings Allowance at this level, so the full £2,500 is taxable, at 45% today (£1,125), rising to 47% from 2027 (£1,175).
A low earner with £9,570 of other income and £6,000 of interest. With other income below £17,570, the starting rate for savings applies. The £3,000 of personal allowance not used against other income shelters the first £3,000 of interest, and the remaining £3,000 fits comfortably inside the £5,000 0% starting rate band. Total tax due: £0, without even touching the Personal Savings Allowance.
That last example is exactly why the starting rate matters, and why it is easy to overlook: it can make a taxable account genuinely tax-free for the right saver, even with a fairly large interest total.
How is the tax actually collected?
You do not need to fill in a form to get your Personal Savings Allowance or the starting rate for savings, and you do not usually need to declare ordinary bank interest yourself. Banks and building societies report the interest they pay you to HMRC each year. If you are employed or receive a pension, HMRC typically collects any tax due by adjusting your PAYE tax code for a future year, spreading the payment through your regular pay rather than asking for it as a lump sum. If you complete a Self Assessment return, for example because you are self-employed, you declare the interest there instead, and any tax due is settled through that return.
Either way, the calculation works the same: your allowances are applied automatically to the total interest reported for you across all your taxable accounts combined, not separately for each account.
Why ISAs matter more as your savings grow
An ISA does not care how large your balance gets or how much interest it earns in a year. None of it is ever taxed. A taxable account only matches that while you stay under your allowance, and two things tend to work against you over time: your balance grows, so the interest it throws off grows with it, and from 6 April 2027 the tax rate on anything above your allowance rises by 2 percentage points at every band.
The personal allowance and the Income Tax thresholds behind these calculations are also frozen until 5 April 2031, so as wages and interest amounts drift upward with inflation, more savers end up crossing their allowance than would have a few years ago. None of this makes a taxable account wrong for smaller balances. It does mean the case for using your ISA allowance tends to get stronger, not weaker, the longer you hold and grow your savings. See our ISA allowance guide for exactly how much room you have each year, and how it splits across cash, Stocks and Shares and other ISAs.
Questions people ask
Do I pay tax on interest inside a Cash ISA?
No, never. All interest earned inside an ISA is entirely tax free, regardless of how large your balance grows or which Income Tax band you are in. This is the one thing a taxable account can never match once your interest outgrows your allowances.
What is the Personal Savings Allowance?
It is the amount of interest you can earn outside an ISA each tax year without paying tax on it: £1,000 if you are a basic-rate taxpayer, £500 if you are a higher-rate taxpayer, and £0 if you are an additional-rate taxpayer.
Who can use the starting rate for savings?
Mainly low earners and some retirees. If your other, non-savings income is below £17,570, you may be able to earn up to £5,000 of interest tax free under the starting rate for savings, on top of any personal allowance you have not used against other income. The available amount shrinks as other income rises toward that threshold.
Will savings tax rates really rise in 2027?
Yes, this is confirmed. From 6 April 2027, tax on savings interest outside an ISA rises by 2 percentage points at every band: 20% to 22% basic rate, 40% to 42% higher rate, and 45% to 47% additional rate. Interest inside ISAs and pensions is unaffected.
If my interest is under my Personal Savings Allowance, is an ISA pointless?
Not necessarily, but the tax-free wrapper is doing less work for you right now. As your balance grows, through further saving or through the interest itself, your total interest tends to grow too, and it can cross your allowance sooner than you expect, especially with two rises to savings tax rates from 2027.
Does a Scottish taxpayer use different savings tax rates?
No. Scottish taxpayers pay the same UK-wide rates as everyone else on savings interest and dividend income. The Scottish Parliament's devolved income tax powers apply to earnings and pensions, not to savings or dividend income.