When you put your money into a savings account or Cash ISA, you don’t just want it to sit there. You reasonably expect your account to offer a good enough interest rate to ensure your savings grow substantively. 

Now, rising ISA rates could mark the end of a classic dilemma for savers: choosing between the tax efficiencies of an ISA and the potentially higher rates of a savings account. 

Read on to find out how ISA rates are starting to move ahead of their non-ISA counterparts, and what this could mean for you as a saver. 

Finding the best account might mean looking beyond the headline rate

For many savers, the decision regarding where to put their cash savings has often involved a trade-off between Cash ISAs and standard savings accounts. 

For example, according to Moneyfacts, the top deals in 2023 were: 

  • Easy access account – 4.8% 
  • Easy access ISA – 4.43% 

While the easy access savings account seems like the obvious choice, the tax advantages of an ISA make the decision more difficult. 

Essentially, a Cash ISA would offer tax-free interest on savings. Meanwhile, for those holding a standard account, interest is taxed once it exceeds your Personal Savings Allowance (PSA).

This is: 

  • £1,000 for basic-rate taxpayers
  • £500 for higher-rate taxpayers

Additional-rate taxpayers do not have a PSA. 

This means that finding the highest interest rate on a savings account isn’t always the only consideration. Once you’ve exceeded your PSA, tax savings on interest can reduce your effective return. 

Case study: ISA v easy access account

Imagine you are a higher-rate taxpayer and have £20,000 to save within one tax year. 

In a Cash ISA paying 4% interest

£20,000 x 4% = £800

Interest in a Cash ISA is tax-free, so you’d keep the full amount. 

In a savings account paying 4% interest

£20,000 x 4% = £800

Your PSA is £500, which means the remaining £300 interest is taxable at 40%. 

£300 x 40% = £120

In this case, you’d keep £680 of the interest and pay £120 in tax, even though both accounts offer identical interest rates.  

However, this calculation could become more complex if the headline interest rates are different. 

In a Cash ISA paying 4% interest

As above, this would be £20,000 x 4% = £800

In a savings account paying 4.5% interest

£20,000 x 4.5% = £900

But taking into account the PSA, you’d then pay 40% tax on the remaining £400, which is £160. 

Your total return would be £740, so still less than the ISA, despite the higher headline interest rate. 

These calculations can become more complex and working out the potential benefits could quickly become a headache for savers. 

Savers could now be spared from making a compromise – but the rules are changing soon

According to Financial Planning Today, by August 2026, ISA rates had climbed to their highest since January 2024. 

The average rates are reported as: 

  • Longer-term fixed ISA (4.27%)
  • One-year fixed ISA (4.24%)

By comparison, average savings rates were reported as: 

  • Longer-term fixed savings (4.25%)
  • One-year fixed savings (4.23%)

As ISA rates are now beginning to move ahead of their non-ISA counterparts, even incrementally, the compromise between tax-free interest or higher rates may no longer be necessary. 

This could be particularly good news for higher-rate taxpayers. According to IFA Magazine, a saver with £20,000 in an average one-year ISA rate could be approximately £138 better off than they would be if they used a non-ISA account. 

However, it is important to note that ISA rules are changing in April 2027. 

In 2026/27, you have a £20,000 annual allowance which you can spread across your ISAs as you wish.  

But from 2027/28, if you are under 65, the overall ISA allowance will remain at £20,000, but the amount you can pay into Cash ISAs will be limited to £12,000 each tax year. If you are aged 65 or over, you will continue to be able to pay up to the full £20,000 allowance into Cash ISAs.

Get in touch

Cash can be an important part of a diversified portfolio, offering you easy-access funds that can continue to grow while deposited. To make sure your cash is being saved optimally, it is important to factor in your tax position, ISA and savings account rates, and your wider financial objectives. 

The IP CashHub can help to make your cash savings work harder and more efficiently. 

We’re always happy to talk to you about your financial plan. Please email hello@intelligentpensions.com or call 0800 0778807. 

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.