Cash ISA vs savings account: which is better in 2026/27?
Should you use a cash ISA or a normal savings account? How the Personal Savings Allowance, the April 2027 savings tax rise and the £20,000 ISA allowance change the answer, with examples.
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The key difference
Both are savings accounts. The only difference is tax:
- Cash ISA: interest is always tax free and never counts towards your allowance. You can pay in up to £20,000 a year across all your ISAs.
- Savings account: interest is tax free up to your Personal Savings Allowance, then taxed at your income tax rate.
Which is better for you?
| Your situation | Usually better |
|---|---|
| Basic rate taxpayer with a small pot | Whichever pays more interest |
| Higher rate taxpayer with £10,000 or more saved | Cash ISA |
| Additional rate taxpayer | Cash ISA (no allowance at all) |
| Savings growing every year | Cash ISA, to protect future interest |
| You might go over the allowance soon | Cash ISA |
Worked example
You are a higher rate taxpayer with £20,000 saved. One account pays 4.2% and a cash ISA pays 4.0%.
- Savings account: £840 interest. £500 is tax free, £340 taxed at 40% now (44% from April 2027) = £136 tax (£150 from 2027). You keep about £704.
- Cash ISA: £800 interest, all tax free. You keep £800.
The cash ISA wins despite its lower rate.
Why the answer is changing
Three things have shifted the maths towards ISAs:
- Allowances are frozen. The Personal Savings Allowance has been £1,000 and £500 since 2016.
- Tax on savings rises to 24%, 44% and 49% from 6 April 2027.
- The cash ISA limit stays at £20,000. A planned cut to £12,000 for under-65s was scrapped in the October 2026 Budget.
Things to check before you choose
- Easy access or fixed? Fixed rates often pay more but lock your money away.
- Flexible ISA? A flexible ISA lets you take money out and put it back in the same tax year without using more allowance.
- Transfers: to move an old ISA, use the new provider's transfer service. Do not withdraw it yourself, or you lose the tax-free wrapper.
- Protection: both are protected by the FSCS up to £120,000 per person, per banking licence.
Common questions
Is a cash ISA worth it for basic rate taxpayers?
If your interest is comfortably under £1,000 a year, the tax benefit makes no difference today. It can still be worth using to protect future interest as your savings and rates grow.
Can I have a cash ISA and a savings account?
Yes. Many people keep an easy-access savings account for day-to-day buffers and a cash ISA for larger savings.
Can I put £20,000 into a cash ISA every year?
Yes. The overall ISA allowance is £20,000 a year and you can put all of it in cash. The planned £12,000 cash limit will not go ahead.
This is general information, not personal tax or financial advice. Tax rules change and depend on your circumstances, so check GOV.UK or speak to an accountant before acting.
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