Cash ISA vs Easy Access Savings: Which Pays More After Tax

Easy access savings accounts frequently advertise higher headline rates than Cash ISAs. That comparison is incomplete, because the two are taxed differently: interest in a Cash ISA is tax-free, while interest in an ordinary savings account is taxable income measured against your Personal Savings Allowance.

The right comparison is the rate you keep, not the rate advertised. For some savers those are the same number. For others they are not, and the gap widens the more you hold.

Compare the rate you keep, not the rate advertised. If all your savings interest fits inside your Personal Savings Allowance, the higher headline rate wins — usually the easy access account.

Once interest exceeds the allowance, the excess is taxed at your marginal rate and the Cash ISA typically wins despite a lower rate. The break-even balance falls sharply for higher rate taxpayers, who have half the allowance and double the tax rate.

Start by establishing three things about yourself:

1. Your Income Tax band. This sets your Personal Savings Allowance: £1,000 for basic rate, £500 for higher rate, £0 for additional rate.
2. How much of that allowance you have already used this tax year, across every taxable interest-paying account you hold.
3. Your marginal rate, which is what applies to interest above the allowance.

Then the logic is straightforward. Interest that falls within your remaining allowance is untaxed, so a taxable account and an ISA are directly comparable on headline rate. Interest above the allowance is taxed at your marginal rate, so the taxable account's effective rate drops while the ISA's does not.

Take an easy access account paying 4.5% and a Cash ISA paying 4.2%, and compare across three savers.

A basic rate taxpayer with £10,000 and no other savings interest. The easy access account produces £450 of interest, comfortably inside the £1,000 allowance, so none of it is taxed. It pays £450 against the ISA's £420. The easy access account wins.

A basic rate taxpayer with £40,000 and no other savings interest. The easy access account produces £1,800. The first £1,000 is covered by the allowance; the remaining £800 is taxed at 20%, costing £160. Net interest is £1,640. The ISA produces £1,680, all of it kept. The ISA now wins despite the lower headline rate.

A higher rate taxpayer with £40,000. The allowance is only £500. Of the £1,800 gross, £1,300 is taxed at 40%, costing £520. Net interest is £1,280 against the ISA's £1,680 — a £400 gap in the ISA's favour.

The pattern is consistent: the more you hold and the higher your band, the more the ISA's tax treatment outweighs a rate disadvantage.

There is a balance at which the two draw level. Below it the higher-rate taxable account wins; above it the ISA does.

To find it roughly: work out the point at which your interest exceeds your remaining allowance by enough that the tax paid cancels the rate advantage. For a basic rate taxpayer with a full £1,000 allowance and a 0.3 percentage point rate gap, that happens somewhere in the mid-£20,000s. For a higher rate taxpayer with a £500 allowance, it happens far sooner — often below £15,000.

Two things push the break-even point down, meaning the ISA wins earlier:

• A higher tax band, which both halves the allowance and increases the rate on the excess
• Other interest-paying accounts, because they consume the same single allowance

Comparing this year's net interest treats the decision as a one-year problem. It is not.

Money inside an ISA stays protected indefinitely. Money outside it is exposed to whatever your circumstances are in every future year. Three things can change:

Your income can rise. A promotion into the higher rate band halves your allowance retrospectively for that tax year and raises the rate on everything above it.

Interest rates can rise. The same balance generates more interest, and more of it falls outside the allowance. Savers who were comfortably inside the PSA in a low-rate environment found themselves outside it when rates climbed.

Your balance can grow. Interest compounds, and so does the taxable amount.

Critically, interest earned inside an ISA is not counted as income at all, so it cannot push you across a tax band. Interest outside can — and savings interest that pushes you into higher-rate tax has consequences beyond the interest itself.

Set against that, the allowance you do not use this year is gone permanently. Filling a Cash ISA has an option value that a spreadsheet comparing this year's rates will not show.

The ISA is not automatically correct. Prefer the taxable account when:

• Your total savings interest sits comfortably inside your allowance and is likely to stay there
• The rate gap is wide rather than marginal
• You need a product feature the ISA does not offer, such as a linked current account or a specific withdrawal facility
• You want to preserve your ISA allowance for a Stocks and Shares ISA in the same tax year, given the £20,000 limit is shared across all ISA types

That last point is frequently overlooked. Using the full allowance on cash means none is left for investments that year.

It also has a deadline attached. From 6 April 2027 the Cash ISA limit falls to £12,000 for savers under 65, while the overall ISA allowance stays at £20,000 — so the trade-off between cash and investments inside the wrapper becomes a decision the rules make for you rather than one you make freely. Savers aged 65 and over are unaffected. If cash is where you want the money, the tax years before that change are the last chance to commit the full £20,000 to it.

Before running any of this, confirm the two rates are expressed the same way. AER is designed for comparison because it accounts for how often interest is compounded; a gross rate is not. Our guide to AER vs gross rate explains the difference and why a headline figure can mislead.

Also check whether either rate includes a temporary bonus that drops away after twelve months, which is common on easy access accounts and turns an apparent winner into a laggard.

Looking for more on this topic? Browse all our savings guides.

This guide is based on UK primary legislation, regulator handbooks, and official guidance. The following sources cover the rules described above:

• Income Tax (Trading and Other Income) Act 2005
• Individual Savings Account Regulations 1998
• HM Revenue & Customs
• FCA Handbook — BCOBS (Banking: Conduct of Business)

Free, impartial money guidance is available from MoneyHelper, the government-backed service run by the Money and Pensions Service.

Related: Personal Savings Allowance Explained | ISA Allowance: How the £20,000 Limit Works | All savings guides.