How much could your cash ISA save you in tax?

Official data reveals ISAs will collectively save us an estimated £6.7 billion in tax this year. We’ve crunched the numbers to find out how much a cash ISA could save you

Decreasing tax; Wooden blocks with "TAX" text of concept
(Image credit: Seiya Tabuchi)

Cash ISAs have brought cheers to many savers this year, with soaring rates reaching above 5%, and more recently, inflation-beating rates.

High interest rates mean more people are paying tax on their interest on traditional savings accounts, but this isn’t the case for ISA holders, who can protect up to £20,000 of their cash from the taxman each tax year. 

According to figures from the Office for National Statistics (ONS), ISAs are set to save us an estimated £6.7 billion in tax in 2023-24 - which is up a third from £4.9 billion compared to a year ago, and up from £3.5 billion five years ago. 

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Sarah Coles, head of personal finance at the wealth manager Hargreaves Lansdown, said: “This massive jump owes an awful lot to higher interest rates on savings, which have pushed so many savers outside an ISA into paying tax on their interest, and protected those with cash ISAs from an enormous chunk of tax.”

Find out how much a cash ISA could save you personally, and if it’s a good time to open the tax wrapper. 

How much could a cash ISA save you in tax? 

Cash ISAs let you save your money without paying a penny in tax. You can squirrel away up to £20,000 each tax year. The good news is that whatever you save as part of your ISA allowance does not count towards your personal savings allowance (PSA) (which protects up to £1,000 of interest from the taxman each year, depending on how much you earn).

Note that your £20,000 ISA allowance also covers stocks and shares ISAs, and lifetime ISAs, so if say you saved £5,000 into a stocks and shares ISA, you’d only be able to contribute a maximum of £15,000 into a cash ISA in that tax year.

Currently, the top-paying cash ISA is 5.27% with Zopa’s One-Year Fixed ISA

We’ve done some calculations to work out how much tax you could save by using this account.

By saving £20,000 in Zopa’s One-Year Fixed ISA, you would earn £1,054 in annual interest. Based on that, here’s how much you would save on tax by putting your money away in this ISA, compared to a normal savings account (and assuming you have already used up your PSA). 

Swipe to scroll horizontally
Tax bandAnnual tax on 5.27% interest from a normal savings account
Basic-rate taxpayers (20%)£210.80
Higher-rate taxpayers (40%)£421.60
Additional-rate taxpayers (45%)£474.30

So, an additional-rate taxpayer could save almost £500 over the year by using an ISA instead of a conventional savings account, while a higher-rate payer could save about £420 and a basic-rate payer could potentially save £210. 

How do my savings get taxed? 

Research by the investment platform AJ Bell found that HMRC is expecting more than 2.73 million people to pay tax on their savings this tax year - including 1.37 million basic-rate taxpayers. 

This is due to rising interest rates - Bank of England rate is currently at 5.25% - causing millions of savers to bust their PSA.

If you have a normal savings account (in other words, an account that isn’t a cash ISA), you will have to pay tax on any interest earned above your PSA.

Here’s what personal savings allowance you have based on your tax band:

Swipe to scroll horizontally
Tax bandHow much tax you payTax-free personal savings allowance
Basic-rate taxpayers20%£1,000
Higher-rate taxpayers40%£500
Additional-rate taxpayers45%No allowance

As additional-rate taxpayers do not have a PSA, ISAs are the only way to earn tax-free interest and therefore especially important to them. 

The ISA market - rates are falling 

If you’re looking to open a cash ISA, there is no time like the present as MoneyWeek has been tracking the market, and rates are falling. 

The top-paying Zopa One Year Fixed ISA fell from 5.41% to 5.32% on 30 November, and dropped again to 5.27% on 7 December. 

Charter Savings One Year Fixed ISA has also dropped in rate twice within a week, from 5.41% on 30 November to 5.36%, and a further fall to 5.26% on 7 December. 

Easy-access cash ISAs are looking more steady, with less frequent rate changes. These are the top rates available on the market right now:  

Vaishali Varu

Vaishali graduated in journalism from Leeds University and she has experience working with the likes of Leicester Mercury, Inews and The Week. She also comes from a marketing background, where she has done copywriting and content creation for businesses. 

Currently writing about all things personal finance, Vaishali is passionate about finding the best deals around, whether it's the best credit cards or the cheapest personal loans, as well as sharing top money hacks to help people save and better manage their money.