Savings accounts versus cash Isas

What's the difference between a savings account and a cash Isa?

Cash Isas used to be the obvious choice for many savers, because they help you avoid tax. However, cash Isas and standard savings accounts are now on a much more even footing, thanks to the personal savings allowance, which was introduced in 2016.

Basic-rate taxpayers can earn £1,000 of annual interest tax-free from savings or current accounts (as of the 2025-26 tax year). Higher-rate taxpayers are entitled to a smaller allowance of £500. Additional-rate taxpayers don't get a personal savings allowance. 

This means savers now face a more finely balanced decision when choosing between cash Isas and savings accounts. Our table summarises the key differences – read on for more detail. 

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Tax on cash Isas vs savings accounts

Prior to 2016, all interest you earned on money paid into a standard savings account would have been liable for income tax at your usual rate (20% for basic-rate taxpayers, 40% for higher-rate taxpayers, or 45% for additional-rate taxpayers). This made cash Isas more attractive, as all interest paid by these accounts has always been tax-free.

Now, any interest you earn that falls within your personal savings allowance isn't subject to income tax and, since 2016, standard savings accounts pay savings interest gross (without deducting any tax). This means you don't have to do a thing if your combined income from savings falls below your personal threshold.

Now that Isas aren't the only way to earn interest tax-free on cash savings, for many people it may make sense to simply plump for the best available savings rates, whether that's a cash Isa, a traditional savings accounts or even a high-interest current account.

Isas can still have tax benefits for some 

Despite being able to earn some tax-free interest on standard savings accounts, cash Isas can still be a good choice, particularly if:

• You hold enough money in savings to risk tipping the interest you earn over the personal savings allowance threshold
• You're a higher-rate taxpayer, or are at all likely to become a higher-rate taxpayer in the future. 

Although the personal savings allowance seems generous when interest rates are low, increases in interest rates (such as those seen in recent years) can cause more savers to exceed the tax-free thresholds. Cash Isas can prevent those savers getting caught out.

The government estimates that 85% of savers do not pay tax on their savings, as of 2024. That number has fallen from an estimate of 95% in 2016 – meaning a higher proportion of us must now pay tax on at least some of our savings.

If you maximise your Isa allowance each year, you can accumulate large sums in a tax-free shelter. This means that Isas can become more valuable over time. 

As an example, over five years, you could theoretically accumulate £100,000 (plus annual interest) in a cash Isa without having to pay any tax on the interest at all. Whereas £100,000 in a standard savings account paying an interest rate of as little as 2% would earn you £2,000 in interest in just one year. Basic-rate taxpayers would have to pay income tax on £1,000 of this, adding up to a tax bill of £200. Higher-rate taxpayers would have to pay tax on £1,500 of their interest – a tax bill of £600.

Tax-free allowance on inherited Isas

Since April 2015, it's possible to pass on your Isa savings to a spouse or civil partner without risking them becoming liable for income tax on these savings. 

The surviving partner is entitled to an additional permitted subscription, or APS allowance. This is a one-off additional Isa allowance equivalent to the value of the deceased person's Isa at the time of death.

• Find out more: Can you inherit an Isa?

Do savings accounts or cash Isas pay more interest?

The traditional assumption is that standard savings accounts pay higher interest rates than cash Isas – but our analysis shows that's not always the case.

Over the last year, fixed-rate standard savings accounts have paid higher rates on average than fixed-rate cash Isas. However, in the same period instant access cash Isas enjoyed higher rates on average than instant access savings accounts.

Easily the most important message for savers is to keep an eye on interest rates and shop around – whether you save in an Isa, a standard savings account, or a current account.

Rates may be higher than a few years ago, but that doesn't mean you're getting the best deal. Following Bank of England base rate cuts in 2024, many providers followed suit by cutting their savings rates. 

As long as you have at least £500 saved, you must be given 14 days' notice of any material reduction in rates, or the end of any bonus or introductory rate.

A material change means a cut of more than 0.25%, or an overall reduction of more than 0.5% over 12 months.

How much can I pay in to a savings account vs a cash Isa?

This is an area where savings accounts win out, as you can only pay a maximum of £20,000 into Isas in each tax year. If you have multiple Isas (including cash Isas, stocks and shares Isas, lifetime Isas and innovative finance Isas), this allowance is stretched across all of them. 

For big savers, this compares unfavourably with standard savings accounts, where you may be able to deposit unlimited sums.

Even where maximum deposits are imposed by individual savings accounts, they are typically much higher than the annual limits for cash Isas (with the notable exception of regular savings accounts). Our November 2024 analysis of Moneyfacts data for fixed and variable rate savings accounts found that the vast majority will allow you to deposit at least £85,000. 

Yet for those with a sizeable savings pot, it's worth remembering that in the unlikely event of a bank or provider collapsing, only your first £85,000 held with the firm is protected. 

So even though you can save large sums within a single standard savings account, that may not always be the safest choice. But there is, of course, nothing stopping you from opening as many standard savings accounts as you wish. 

How many savings accounts and cash Isas can I have?

Cash Isas and savings accounts are equally matched on this measure. 

There's no limit on the number of standard savings accounts you can open or pay into – nor has there ever been. 

Until recently, the situation was different for Isas, and you could only pay into one cash Isa per tax year. 

Since 6 April 2024, that's no longer the case. You can have cash Isas with multiple providers and pay into each of them within the same tax year, providing that you don't exceed your overall £20,000 Isa limit.

Are cash Isas or savings accounts more flexible?

Along with the introduction of the personal savings allowance in 2016, the government also introduced 'flexible' Isas. Before this, if you'd used up your £20,000 Isa allowance in a tax year and then withdrew some of it, you wouldn't have been able to pay it back in within the same tax year. 

Flexible Isas allow you to withdraw funds from an Isa and replace it, without it affecting your annual Isa allowance – as long as you do so into the same account, and in the same tax year.

But Isa providers are not obliged to offer this facility, so you may not be able to make use of it.

At the moment, Which? Recommended Providers Yorkshire Building Society and Zopa both offer flexible cash Isas.

With most savings accounts, there are no restrictions on taking money out and then paying it back in. However, be aware that both savings accounts and cash Isas may place restrictions on particular accounts – for example fixed-term accounts may not allow penalty-free withdrawals until the end of your term, while other types of account may limit the number of withdrawals you can make per year, or require you to give notice of withdrawals. 

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Are Isas still worthwhile?

While the playing field has levelled between savings accounts and cash Isas in recent years, some may still find significant tax benefits in saving into a cash Isa over a savings account. 

It's also worth bearing in mind that cash Isas aren't the only type of Isa available. You can also open stocks and shares Isas, innovative finance Isas and Lifetime Isas. 

Each of these has its own features and benefits. For example, Lifetime Isa savers can benefit from a government bonus of up to £1,000 a year. And, just as cash Isas are exempt from tax on savings interest, returns on investments held in stocks and shares Isas are free of income tax, dividend tax and and capital gains tax.