Comparison · 2025/26
Cash ISA vs Savings Account
For most of the last decade, the conventional wisdom was simple: ordinary savings accounts paid a high enough premium over Cash ISAs that the Personal Savings Allowance (PSA) covered any tax bill — so the non-ISA account won. In 2024-25, with rates near a 15-year high and the PSA frozen at £1,000 / £500 / £0, the maths has tilted back. Here is when each genuinely wins for the 2025/26 tax year.
The headline shift
Historically, the gap between the best ordinary savings rate and the best Cash ISA rate ran at 40-80 basis points. The Personal Savings Allowance — introduced in April 2016 at £1,000 for basic-rate and £500 for higher-rate taxpayers — covered most savers comfortably. With a £30,000 pot at 2%, you were generating £600 of interest, well within the PSA, and the headline-rate premium on the taxable account beat the ISA outright.
Two things broke that calculus simultaneously. First, the Bank of England base rate climbed from 0.10% to a peak of 5.25% in 2023, settling around 4.75% by mid-2025. Suddenly even modest balances generated four-figure interest, blowing through the PSA. Second, the rate gap between ISA and non-ISA has compressed — top easy-access Cash ISAs now sit only 10-30bp behind their non-ISA equivalents, because providers are competing aggressively for the ISA wrapper.
The PSA itself remains frozen — it was £1,000 / £500 / £0 in 2016 and is still £1,000 / £500 / £0 in 2025/26. With ten years of inflation, that allowance has lost roughly a third of its real value. For higher-rate and additional-rate savers, the Cash ISA is, for the first time in a decade, the default choice.
Personal Savings Allowance 2025/26
- Basic-rate (income £12,571-£50,270): £1,000 of savings interest tax-free.
- Higher-rate (£50,271-£125,140): £500 tax-free. Interest above the £500 is taxed at 40%.
- Additional-rate (over £125,140): £0 PSA. Every penny of savings interest is taxed at 45%.
The PSA is not transferable between spouses and not pro-rated. Cross the £50,270 higher-rate threshold by £1 and you lose £500 of allowance — a £200 cliff-edge if you are generating £1,000 of interest. This is why salary sacrifice and pension contributions matter for marginal-band savers.
Starting Rate for Savings — the forgotten £5,000
On top of the PSA, the Starting Rate for Savings gives you up to £5,000 of savings interest at 0% — but only if your other income is below the £12,570 Personal Allowance. The starting rate tapers £1-for-£1 above the PA: at £13,570 of other income you get £4,000, at £17,570 it disappears altogether.
This makes a real difference for early retirees living off cash before State Pension age, low-earning sole traders, and one-income couples where the non-earner holds the savings. A retiree with £8,000 of taxable pension income can earn £5,000 starting rate + £1,000 PSA = £6,000 of savings interest tax-free, no ISA needed.
Cash ISA mechanics 2025/26
The annual ISA allowance is £20,000, shared across all ISA types (Cash, Stocks & Shares, Innovative Finance, Lifetime). The LISA is capped at £4,000 within the £20,000. Interest inside the wrapper is tax-free regardless of income — additional-rate earners get the same treatment as basic-rate.
Since April 2024 you can subscribe to multiple ISAs of the same type in the same tax year. You can open three Cash ISAs at three providers and split the £20,000 however you like. To move existing ISA money between providers, always use the receiving provider\'s ISA transfer form — withdrawing and re-depositing burns your fresh allowance.
Look for the «flexible» label if you might dip into the pot mid-year. A flexible ISA lets you withdraw money and replace it within the same tax year without it counting again against your £20,000.
Worked break-even: higher-rate saver with £30,000
Take a higher-rate taxpayer on £60,000, with £30,000 in savings. Easy-access rates:
- Ordinary savings @ 5.00% → £1,500 gross interest.
- PSA covers £500; remaining £1,000 taxed at 40% = £400 tax.
- Net: £1,100 → 3.67% net (after tax on the taxable portion).
- Effective return on the £30,000: £1,100 / £30,000 = 3.67%.
- Cash ISA @ 4.70% → £1,410 tax-free.
- Net return: 4.70%.
- ISA wins by £310 per year at this balance.
For the ordinary account to break even, it would need to pay roughly 5.83% — a 113bp premium that no UK savings table currently offers on like-for-like terms. Whenever the headline gap is below ~80bp at higher rate (or any positive number at additional rate), the ISA pulls ahead once interest exceeds the PSA.
Bank rate environment 2025/26
Bank of England base rate sits around 4.75% in mid-2025/26 after a cautious easing cycle. Indicative best-buy ranges:
| Product | Best-buy range | ISA gap |
|---|---|---|
| Easy-access savings | 3.0-5.0% AER | – |
| Easy-access Cash ISA | 3.5-4.5% AER | ~10-30bp behind |
| 1-year fixed savings | 4.5-4.8% AER | – |
| 1-year fixed Cash ISA | 4.3-4.7% AER | ~10-20bp behind |
The compression of the ISA-to-savings gap is the structural change. A decade ago the gap regularly ran 60-100bp; today 10-30bp is typical, well below the tax saving for any non-basic-rate payer with a meaningful balance.
FSCS protection — £85k per licence, not per bank
The Financial Services Compensation Scheme covers up to £85,000 per person per banking licence. The trap: some bank brands share a single licence. If you hold £60,000 with Halifax and £40,000 with Bank of Scotland, FSCS protects £85,000 of the combined £100,000 — the rest is at risk.
Other shared-licence groups include Royal Bank of Scotland / NatWest (separate licences as of 2024 — verify before depositing), HSBC / First Direct (shared), and Lloyds / Bank of Scotland (shared). Anyone holding more than £85k of cash should be spreading it across genuinely separate licences, including ISA balances which count against the same cap.
When the savings account still wins
- Basic-rate payer with expected interest under £1,000. The PSA absorbs all the tax; a 20-30bp headline premium on the non-ISA account is pure upside.
- Joint account, both basic-rate. Each uses their £1,000 PSA, so up to £2,000 of interest is tax-free annually before the ISA matters.
- Short-term cash you might need on the way in. If you have not yet used your ISA allowance and are not sure you will keep the money invested, an ordinary account preserves the option of doing a single end-of-year ISA top-up.
- Under the PSA threshold permanently. If your savings will not realistically generate more than £500-£1,000 in a tax year, the wrapper is administrative overhead with no benefit.
- Cashback / linked current account perks. Some regular savers paying 6-8% are only available alongside a current account; the headline rate often offsets the lost ISA wrapper.
When the Cash ISA wins
- Higher-rate (£500 PSA). Once interest exceeds £500, every additional pound is taxed at 40%. A 30bp lower ISA rate is more than compensated for any balance generating £600+ of interest.
- Additional-rate (£0 PSA). Every penny of taxable interest is taxed at 45%. The Cash ISA is essentially mandatory.
- Large balances (£50k+). Even at basic rate, £50k at 4.5% generates £2,250 — well above the £1,000 PSA. The ISA wins on the marginal £1,250.
- Rising income trajectory. If you expect to cross into higher rate, building ISA balances now compounds tax-free as your PSA shrinks.
- Estate planning continuity. The «Additional Permitted Subscription» (APS) lets a surviving spouse inherit the deceased\'s ISA allowance in addition to their own — preserves tax-free status across generations.
Decision matrix by tax band × balance
| Tax band | Small (<£10k) | Medium (£10-50k) | Large (£50k+) |
|---|---|---|---|
| Basic (20%) | Savings (PSA covers) | Mixed — ISA once over £1k interest | Cash ISA |
| Higher (40%) | Mixed — savings if interest <£500 | Cash ISA | Cash ISA (max allowance) |
| Additional (45%) | Cash ISA | Cash ISA | Cash ISA + S&S ISA |
The matrix simplifies a continuous decision into bands, but the underlying rule is consistent: compare the post-tax return on the savings account with the headline ISA rate. If the ISA is within ~80bp at higher rate, ~25bp at basic rate (with PSA exhausted), or any positive number at additional rate, the ISA wins.