Switching to a Cash ISA could boost savings by as much as £138 a year, according to reports. Around five million Brits are expected to pay tax on their savings this year because they are not holding their cash in tax-efficient accounts.
Rate comparison and tax implications
There are 2,617 savings and ISA deals available, according to comparison platform Moneyfactscompare. Easy access accounts and ISAs offer average interest rates of 2.53% and 2.72% respectively. Fixed-interest deals offer even better returns, with one-year fixed savings accounts averaging 4.23% – their highest since November 2024 – and ISAs averaging 4.24%.
Higher interest rates can mean exceeding the Personal Savings Allowance (PSA), the amount people can earn in interest each year without paying tax. Basic-rate taxpayers can earn up to £1,000 in interest tax-free, while 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.
Benefits of moving to an ISA
Savers moving their cash into an ISA can save up to £20,000 per year without paying tax on interest earned, potentially avoiding payments of hundreds of pounds to 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.”
Yorkshire Building Society has described the rise in the number of savings accounts generating enough interest to breach the PSA as “unprecedented”. The number of non-ISA savings accounts set to earn more than £1,000 in interest has shot up. According to the Financial Conduct Authority, people hold between three and five savings products across two to three providers, so they could be liable for tax 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.”
Market shift and future ISA changes
Eastell said current deals see the fixed-rate savings market shift in favour of ISA savers. 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.” She noted more opportunities on the market with accounts paying above base rate. “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.”
Changes to ISA rules are in store from April next year. The Cash ISA allowance will be reduced to £12,000 for under-65s, while the limit for Stocks and Shares and Innovative Finance ISAs will remain at £20,000.
