Cash ISA vs Savings Account: The Breakeven Point for 2026/27

Why the Cash ISA is not always the winner

A Cash ISA is always tax-free, but that does not automatically make it the best place for your cash. The reason is the Personal Savings Allowance (PSA), which lets many savers earn interest tax-free in an ordinary account too.

For 2026/27 the PSA is:

• GBP 1,000 for basic-rate (20 percent) taxpayers
• GBP 500 for higher-rate (40 percent) taxpayers
• GBP 0 for additional-rate (45 percent) taxpayers

Because the ISA allowance is GBP 20,000 a year and you only get one ISA wrapper per type, it is worth knowing the exact point at which the ISA starts to win.

The breakeven idea

A taxed savings account only costs you tax once your interest exceeds your PSA. Below that point, the headline rate is what you actually keep, so a slightly higher non-ISA rate can beat an ISA. Above that point, every extra pound of interest is taxed at your marginal rate, so the ISA pulls ahead.

The breakeven balance is simply:

Breakeven balance = PSA / interest rate

Worked example at a 4 percent rate

Assume both accounts pay 4 percent. We can find the balance at which interest equals the PSA.

• Basic-rate saver: GBP 1,000 / 0.04 = GBP 25,000
• Higher-rate saver: GBP 500 / 0.04 = GBP 12,500
• Additional-rate saver: GBP 0, so the ISA wins from the first pound

So a basic-rate saver with GBP 30,000 in a 4 percent account earns GBP 1,200 of interest. The first GBP 1,000 is covered by the PSA, and the remaining GBP 200 is taxed at 20 percent, costing GBP 40. Moving the balance that generates that excess interest into a Cash ISA removes the GBP 40 charge.

A higher-rate saver with the same GBP 30,000 earns GBP 1,200, uses a GBP 500 PSA, and is taxed on GBP 700 at 40 percent, a GBP 280 charge. The ISA saving is much larger, which is why higher earners reach for the ISA at smaller balances.

How the breakeven moves with the rate

The breakeven balance falls as rates rise, because the same balance throws off more interest:

• At 3 percent, a basic-rate saver breaks even around GBP 33,333
• At 4 percent, around GBP 25,000
• At 5 percent, around GBP 20,000

For higher-rate savers, halve those balances because the PSA is GBP 500 rather than GBP 1,000.

Practical points to weigh

• The PSA is shared across all your non-ISA interest, including current accounts and bonds, so check your total.
• ISA interest never counts towards the PSA, so filling an ISA preserves the allowance for other accounts.
• The ISA allowance is use-it-or-lose-it each tax year, so unused room does not roll forward.
• Joint savings split the interest, which can keep a couple under two separate PSAs.
• Fixed-rate bonds can pay interest in a single tax year, which may push a one-off spike over the PSA.

So which should you choose?

If your savings are modest and your interest stays comfortably under your PSA, a top-paying ordinary account can be perfectly efficient, and the rate is what matters most. As your balance grows, or if you are a higher or additional-rate taxpayer, the Cash ISA becomes the more tax-efficient home and protects future interest from tax as rates change.

A sensible approach for many savers is to fill the Cash ISA first if you expect to breach your PSA, then use the best ordinary account for the rest.

This is general information, not financial advice. To see how much interest your balance would generate and where the breakeven falls for you, try the CalcHub savings interest calculator and confirm the current allowances on gov.uk.