Answers · UK 2025/26

Should a higher-rate taxpayer use a cash ISA or rely on the Personal Savings Allowance?

A higher-rate taxpayer gets only a £500 Personal Savings Allowance and pays 40% on interest above it, so a cash ISA usually wins once interest exceeds about £500. In an ISA all interest is tax-free with no limit beyond the £20,000 annual allowance.

Last updated: 10 June 2026Last reviewed: 10 June 2026How we verify

Full answer

The Personal Savings Allowance (PSA) lets basic-rate taxpayers earn £1,000 of savings interest tax-free, but higher-rate taxpayers get only £500, and additional-rate taxpayers get nothing. Above the PSA, interest is taxed at your marginal rate: 40% for higher-rate, 45% for additional-rate. A cash ISA shelters interest completely, with no tax at any rate, within the £20,000 annual ISA allowance. Worked example: a higher-rate taxpayer holds £40,000 in an account paying 4.5%, earning £1,800 of interest. The first £500 is covered by the PSA; the remaining £1,300 is taxed at 40%, a £520 tax bill, leaving £1,280 net. The same £40,000 in cash ISAs (built up over two years using the £20,000 allowance each year) earns the full £1,800 tax-free, a £520 saving every year that interest stays at that level. For an additional-rate taxpayer with no PSA, the whole £1,800 would be taxed at 45% outside an ISA, so the ISA advantage is even larger. The break-even point is roughly where interest exceeds your PSA: above £500 of interest a higher-rate saver is generally better off in an ISA, all else equal. Compare ISA rates against non-ISA rates, since a much higher non-ISA rate can occasionally offset the tax. Use the savings calculator to compare net returns and the ISA calculator for tax-free growth. For Personal Savings Allowance rules, see gov.uk.