Brits could boost their savings by as much as £138 per year by switching to a Cash ISA, according to Moneyfactscompare. Around five million Brits are expected to pay tax on their savings this year because they are not holding cash in tax-efficient accounts.
Record number of savings deals
Overall product choice continues to beat all-time highs, rising to 2,617 savings and ISA deals. Easy access accounts and ISAs interest rates average 2.53% and 2.72% respectively. Fixed-interest deals are offering even better returns, with one-year fixed savings accounts averaging 4.23% - their highest since November 2024 - and ISAs averaging 4.24%.
However, higher interest rates leave many at risk of exceeding their Personal Savings Allowance, the amount you can earn in interest per year without paying tax.
Tax implications for savers
Currently, basic-rate taxpayers can earn up to £1,000 in interest tax-free, and higher-rate taxpayers can earn up to £500. Additional-rate taxpayers receive no exemption and are taxed on all interest earned outside of tax-free accounts.
Savers opting to move their cash into an ISA can currently put away up to £20,000 per year without paying tax on interest earned, saving them hundreds in payments to HM Revenue & Customs (HMRC).
Caitlyn Eastell, personal finance analyst at Moneyfacts, said: “For a saver with £20,000, the average one-year ISA rate would give around £848 in interest over a year, compared with £846 in a non-ISA account.
"While the £2 difference may seem small, for a higher-rate taxpayer with a £500 Personal Savings Allowance, the ISA could leave them around £138 better off, with the full £848 interest kept compared with around £708 from the non-ISA after tax. On larger balances, the benefit of switching becomes even more apparent."
Unprecedented rise in taxable accounts
Yorkshire Building Society described the rise in the number of UK savings accounts that will generate enough interest to breach the PSA as "unprecedented". The number of non-ISA savings accounts forecast to earn over £1,000 in interest has increased by 1047% since 2018, according to CACI figures.
In January 2018, around 462,000 accounts would have earned more than £1,000 in interest and would have been potentially liable for tax. Despite a temporary dip during the ultra-low-rate years of the pandemic, the number exploded as rates rose — reaching 2.5 million in January 2023, before surging to today’s figure of 5.3 million, which remains more than eleven times higher than in 2018.
According to the Financial Conduct Authority (FCA), people hold between three and five savings products across two to three providers, meaning those who could be liable for tax may be doing so without realising it.
Tina Hughes, director of savings at Yorkshire Building Society, said: “The scale of this shift is staggering. Our analysis shows that the number of savings accounts potentially exposed to tax has gone from under half a million to well over five million in just a few years. This isn’t about people suddenly becoming wealthy — it’s about a frozen allowance colliding with much higher interest rates.”
ISA rates now ahead of non-ISA
Commenting on the current deals on the market, Moneyfacts' Caitlyn Eastell said the fixed rate savings market is shifting in favour of ISA savers, with average one-year and long-term ISA rates now moving ahead of their non-ISA counterparts.
She said: "Historically, savers have often faced a trade-off between securing competitive rates outside an ISA or keeping their interest tax-free. However, this shift could mean that the compromise is no longer necessary.
The wider savings market is also offering more opportunities for competitive returns, with 1,412 accounts paying above base rate, the highest number seen since July 2012. While growing choice is great for returns, savers, particularly higher-rate taxpayers, must carefully consider where they keep their pots. Moving to a competitive ISA could mean more of their returns stay in their pocket."
ISA rule changes in 2027
From April 2027, the Cash ISA allowance will be reduced to £12,000 for under-65s, while the limit for Stocks and Shares and Innovative Finance ISAs (non-Cash ISAs) will remain at £20,000. To support the change, Labour said a number of rules will be introduced to “ensure the policy achieves its objective” of encouraging retail investment and supporting better returns for savers. The new rules are designed to minimise opportunities to circumvent the lower Cash ISA limit, while preserving the flexibility needed for legitimate investment activity within non-Cash ISAs.
