ISA vs savings account: which makes sense for you?
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FSCS protects eligible deposits up to £120,000 per person, per authorised institution.
Quick answer
A cash ISA and a savings account both hold cash and pay interest. The difference is tax: ISA interest is always tax-free, while savings account interest counts towards your Personal Savings Allowance.
If your interest is comfortably within that allowance, an ordinary savings account paying a higher rate can leave you better off today. If your interest could go over it — or might in future — an ISA protects that money from tax for as long as it stays in the wrapper.
Cash ISA vs savings account at a glance
| Feature | Cash ISA | Savings account |
|---|---|---|
| Tax on interest | Tax-free | Taxable above your Personal Savings Allowance |
| Annual limit | £20,000 across all ISAs in 2026/27 (GOV.UK, checked 4 October 2026) | No limit, though providers set their own maximums |
| Access | Easy-access or fixed, depending on the account | Easy-access, notice or fixed, depending on the account |
| FSCS protection | Up to £120,000 per person per banking group | Up to £120,000 per person per banking group |
| Rates | Can be higher or lower than non-ISA accounts | Sometimes higher, because the tax benefit isn’t included |
| Transfers | Can be transferred between providers while keeping tax-free status | Withdraw and redeposit freely |
Allowances as of 3 October 2026. Tax rules can change, and how they apply depends on your circumstances.
Who it’s for
- Anyone deciding where to put new savings
- Higher-rate and additional-rate taxpayers, whose tax-free interest allowance is smaller or nil
- Savers whose balances are growing year by year
Who should skip it
These are general points to weigh up, not advice. You may want to look elsewhere if:
- You’re saving for a home and qualify for a Lifetime ISA — that has its own rules and bonus
- You want long-term investment growth rather than cash
Full explanation
The Personal Savings Allowance lets basic-rate taxpayers earn £1,000 of savings interest a year without tax, higher-rate taxpayers £500 and additional-rate taxpayers nothing. Some people on lower incomes may also benefit from the starting rate for savings.
A simple example: £10,000 earning 4% AER produces about £400 of interest a year. For a basic-rate taxpayer that’s within the £1,000 allowance, so the tax wrapper makes no difference today. For an additional-rate taxpayer, all of it would be taxable outside an ISA.
Think ahead, too. Your balance, your income and rates all change.
Money already in an ISA stays tax-free in future years, whereas the ISA allowance itself can’t be carried forward. The ISA allowance for the 2026/27 tax year is £20,000 (GOV.UK, checked 4 October 2026).
You don’t have to pick one. Many savers keep an easy-access savings account for emergencies and use an ISA for longer-term cash. Our Should I open an ISA? guide gives a quick checklist.
The catch
The ISA allowance is “use it or lose it” each tax year, while the Personal Savings Allowance resets every year too. Choosing a lower-paying ISA just for the tax benefit can cost you if your interest would have been tax-free anyway. On the other hand, money you keep outside an ISA can’t be moved into one later beyond each year’s allowance.
Ready to compare accounts?
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FAQs
Is a cash ISA better than a savings account?
Neither is better for everyone. An ISA keeps interest tax-free; a savings account may pay more but its interest can be taxed above your Personal Savings Allowance.
What is the Personal Savings Allowance?
It’s the amount of savings interest you can earn tax-free each year outside an ISA: £1,000 for basic-rate taxpayers, £500 for higher-rate and nothing for additional-rate taxpayers.
Can I have both an ISA and a savings account?
Yes. There’s no rule against holding both, and many people do.
Do ISAs and savings accounts have the same protection?
Eligible deposits in both are covered by the FSCS up to £120,000 per person, per authorised banking group.
If I move savings into an ISA, does it use my allowance?
Yes. New money paid into an ISA counts towards that year’s allowance. Transfers between ISAs don’t.
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