ISAs vs savings accounts: what’s the best home for your cash savings?

An ongoing freeze to tax bands and allowances is putting savers at greater risk of being taxed on their savings, and further challenges lie ahead for savers.

In the 2025 Autumn Budget, chancellor Rachel Reeves extended a freeze on income tax thresholds to 2030/31, which will mean more people are dragged into higher tax brackets as incomes rise. Furthermore, from April 2027, the tax rates on savings income will be hiked, and under 65s will be capped at putting £12,000 a year into cash ISAs (rather than up to £20,000).

Some 2.64 million people are expected to pay tax on their savings in the 2025/26 tax year, according to HMRC data obtained by AJ Bell through a Freedom of Information request in August 2025. Just 647,000 were affected in 2021/22.

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This includes a projected 1.15 million basic-rate taxpayers and 897,000 higher-rate taxpayers.

It means around one in 25 basic-rate taxpayers and one in eight higher-rate taxpayers face paying tax on their savings this tax year, AJ Bell said.

Why are more savers facing tax on savings interest?

Savings accounts became much more attractive in recent years, following 14 consecutive base rate hikes between December 2021 and August 2023 and lower levels of inflation. Interest rates are now on a downward trend, but the average easy access savings account at the end of January 2026 still paid 2.44% – 1.85 percentage points higher than the 0.59% average rate paid at the start of January 2020.

Higher interest rates, combined with frozen tax allowances, leaves more and more savers at risk of being taxed on their savings interest.

While you can earn some interest in traditional savings accounts without being taxed, cash ISAs are a tax-free savings vehicle, meaning they are a useful way to protect interest on savings from the taxman.

These tax-free wrappers had fallen out of favour in recent years as paltry interest rates across all types of accounts meant many savers found themselves well within the personal savings allowance threshold.

Laura Suter, director of personal finance at AJ Bell, told MoneyWeek: “For years, most savers didn’t give a second thought to paying tax on their interest – rates were low and the personal savings allowance offered a generous cushion. But the landscape has changed rapidly.

“A combination of rising interest rates, frozen tax thresholds, more people being pushed into higher tax bands, and years of cash ISAs being overlooked means many are now being pulled into the tax net for the first time.”

Tax on savings: allowances

Taxpayers can use their personal allowance (typically £12,570) to earn interest tax-free if it hasn't been used up on other forms of income, such as wages or a pension. If your adjusted net income is more than £100,000, your personal allowance reduces by £1 for every £2 above this threshold, so you’d lose it entirely if your income is £125,140 or more.

Some people can also earn up to £5,000 of interest tax-free, known as the starting rate for savings. This allowance reduces by £1 for every £1 of other income above the personal allowance. People with income of £17,570 or more will not be able to get this allowance.

The personal savings allowance protects some savings interest from the taxman.

Basic-rate taxpayers (taxable income of £12,571 to £50,270) can earn £1,000 in interest tax-free via this allowance, while higher-rate taxpayers (taxable income of £50,271 to £125,140) have a personal savings allowance of £500. Additional-rate taxpayers (taxable income over £125,140) are not eligible for any personal savings allowance, meaning every penny they earn in interest is taxable.

Some £516 billion held in 5.2 million non-ISA adult savings accounts would generate enough interest to breach the basic-rate taxpayer’s personal savings allowance (PSA), according to analysis of CACI data by Paragon Bank in November 2025.

Cash ISA vs traditional savings accounts: Which pays more?

The interest rates offered on the best savings accounts are substantially higher than the rates seen five years ago, with the top rate for a one-year fixed savings account now standing at 4.4% AER/gross. The highest-paying easy access account (including bonus) pays 4.5% AER/4.41% gross. Rates are according to Moneyfactscompare.co.uk and correct at the time of writing.

The best cash ISA rates also pay above 4% – the highest-paying one-year fixed ISA offers a rate of 4.15% AER/gross while the top variable cash ISA pays 4.39% AER/4.3% gross.

The number of savings accounts available (excluding cash ISAs) stood at 1,661 in January 2026 – up from 1,542 the year before. Meanwhile, the number of cash ISAs on the market was 657, compared to 574 in January 2025, according to the Moneyfacts UK Savings Trends Treasury Report.

The average easy access savings account (excluding ISAs) paid 2.48% this January, down from 2.89% in the same period last year. The average easy access cash ISA rate has also slipped year-on-year – it’s now 2.69%, down from 3.03%.

We look at what savers need to consider when deciding between a traditional savings account and an ISA.

Benefits of a traditional savings account

You can earn interest on cash held in a traditional savings account, and while this isn’t tax-free, there are allowances available, so you can earn some interest without paying tax on it.

Sometimes, the rates on the best savings accounts are higher than those paid by tax-free cash ISAs, making them seem more attractive.

Unlike ISAs, traditional savings accounts do not tend to have a cap on how much you can save in them.

You can usually put in as much as you like within the account, although the Financial Services Compensation Scheme only protects the first £120,000 saved in each financial institution in the event that it goes bust. You can check if your savings – whether they’re in a traditional account or a cash ISA – are protected by the FSCS using their bank and savings protection checker.

Downsides of traditional savings accounts

Once you start to build a larger savings pot ‒ particularly if you are a higher-rate taxpayer ‒ you’re far more likely to have to hand over some of the earnings to the taxman.

MoneyWeek has calculated that higher-rate taxpayers would start paying income tax on their interest once they hold just over £11,100 in the current top easy access account, assuming it paid 4.5% for the year. Basic rate taxpayers could save just over £22,200 in an account with this rate before their savings interest becomes subject to tax.

If interest rates were to rise, more savers with traditional savings accounts would find their returns are taxed as they would earn above the personal savings allowance.

Suter, from AJ Bell, warned many won’t realise they’re breaching the tax-free limit.

“Self-assessment filers will need to declare any interest earned, but for those on PAYE, HMRC will collect the data directly from their payslip by adjusting their tax code,” she said.

“That can lead to a nasty surprise when people see their take-home pay suddenly fall.”

Benefits of an ISA

ISAs let you save or invest, entirely tax-free.

There is an annual ISA allowance though ‒ currently set at £20,000 for the 2025/26 financial year.

There are various types of ISA available, but the annual ISA allowance spans deposits into all of these options per tax year.

Cash ISAs

If you’re a saver who wants some low-risk certainty then you can put your money into a cash ISA, which works exactly like a traditional savings account except the interest is guaranteed to be tax-free.

Stocks and shares ISAs

If you’re happy to accept a little more risk, in return for the chance of higher returns, then you could opt for a stocks and shares ISA.

The types of investment that can be held within a stocks and shares ISA varies based on the provider, but it allows savers to enjoy every penny of the returns generated from individual stocks, funds, bonds and the like in their ISA without being subject to dividend tax or capital gains tax.

Lifetime ISAs

The Lifetime ISA (LISA) is another type of ISA, which is aimed at two distinct types of saver: those looking to build up a deposit to use when purchasing a house, or those who want to save for retirement.

Eligible savers can deposit up to £4,000 per tax year into a LISA – this limit counts towards the £20,000 annual ISA allowance.

The money you save in a Lifetime ISA is eligible for a 25% bonus from the government each year, with the bonus capped at £1,000. You must be under 40 to open a Lifetime ISA and if you’re using a Lifetime ISA to save for retirement you won’t be able to access the cash until age 60 without incurring a penalty.

The chancellor announced the government will publish a consultation in “early 2026” on the implementation of a new, simpler ISA product to help first-time buyers purchase a home. This would be offered in place of the Lifetime ISA.

Innovative finance ISAs

Another form of investment ISA available is the Innovative Finance ISA, which can be used to invest in alternative assets like peer-to-peer loans (or crypto ETNs from April).

Junior ISAs

A Junior ISA (JISA) is a tax-free savings account specifically for children.

Parents can put money aside for their children in a Junior ISA, but the money belongs to the child. The child can take control of the account when they turn 16 but can’t withdraw from it until their 18th birthday.

There is a different limit for Junior ISAs – up to £9,000 can be deposited in Junior ISAs per tax year.

There are two types: a cash Junior ISA and a stocks and shares Junior ISA. A child can have one or both of these types.

How much can you put in a cash ISA?

You can deposit up to £20,000 into ISAs each tax year, but you can also transfer ISA savings. You could benefit from moving ISA savings from previous years to ISAs with a higher interest rate, if the account allows transfers. By transferring the ISA savings, you are preserving the tax-free status.

Any unused ISA allowance cannot be carried over to future years. So, if you put less than £20,000 in any tax year into ISAs, that unused allowance is gone forever. This could be frustrating if you suddenly come into a windfall – for example, a large bonus or an inheritance.

From 6 April, 2027, under 65s will only be able to put £12,000 into cash ISAs annually. This is included within the overall £20,000 ISA limit. The annual subscription limit for Lifetime ISAs will remain at £4,000.

If you are 65 or older, you can continue to put up to £20,000 into a cash ISA each tax year, if you wish to.

Previously, you could only open one of each main type of ISA in any one tax year, but this rule changed as of April 6, 2024.

Now, savers can open and pay into multiple of the same type of ISA, for example open more than one cash ISA, within a tax year.

Caitlyn Eastell, personal finance analyst at Moneyfactscompare.co.uk, said cash ISAs are hugely popular among savers, and they are “one of the best options for those wanting to avoid an unexpected tax bill”.

“The upcoming 2026/27 tax year marks the final period for savers under 65 to maximise their £20,000 cash ISA allowance, which could lead to a very competitive ISA season, but the ‘rate war’ peak isn’t typically until around March and April,” she said.

“This may encourage some savers to adopt a ‘wait-and-see’ approach, however with savings rates anticipated to fade this year, trying to time the market could leave them worse off in real terms. To avoid missing out, savers should regularly review their rates over the coming months to ensure they’re getting a fair deal.”

Downsides of an ISA

While the returns from ISAs are free of tax, that doesn’t necessarily mean that you will be better off by using them. As with general investment accounts, if you opt for an investment ISA (the stocks and shares ISA or the innovative finance ISA), there is the risk that the assets you invest in could lose value. As a result, you may end up with less than you started with.

Moving money between ISAs can also be challenging. Not all ISAs accept inward transfers. This means that you cannot move money that’s already held in an ISA into them. This can mean limited choice when it comes to finding a new home for your savings. What’s more, the money must be transferred directly from one ISA to another, in order to retain its tax-free status.

If you withdraw the savings from an ISA, even if it’s to subsequently deposit it into another ISA, it will count towards the £20,000 annual ISA allowance. ISA transfers do not count.

Traditional savings accounts and ISAs

There is nothing to stop savers from using both ISAs and traditional savings accounts. In fact, for some savers, this will make sense.

For example, if you have used the entirety of your £20,000 annual ISA allowance, then that does not have to be the limit to your savings. Once you hit that threshold you can continue to save money in a traditional savings account for the rest of the tax year.

“Traditional savings accounts tend to offer better rates, which can be crucial when savers are trying to grow their cash faster than inflation,” Eastell said.

“These may be a more suitable option for those that are unlikely to find themselves breaching their personal savings allowance. Ultimately, savers should have a clear understanding of their tax implications to help decide which account may suit their needs.”

It also might make sense to divide the money you’re saving ‒ based on whether you need to access it in the short or long term, and the interest rates available on different accounts.