Cash ISA vs Savings Account: Your £1,000 PSA Covers You Today — But the 2027 Reform Makes This Year's Allowance Critical

The Personal Savings Allowance gives basic-rate taxpayers £1,000 of tax-free interest per year. Higher-rate taxpayers get £500. Additional-rate taxpayers get nothing.

At 4.7% — the current best easy access cash ISA rate from Prosper via MoneySavingExpert — a basic-rate taxpayer can hold roughly £21,277 in a regular savings account before breaching the PSA. A higher-rate taxpayer hits their limit at just £10,638.

Those thresholds sound comfortable until you remember HMRC aggregates interest from every non-ISA account you hold. A current account paying 5% on £1,500 eats £75 of your allowance. A notice account at 4.5% on £10,000 takes another £450. Suddenly your PSA headroom for the main savings pot is £475, not £1,000.

The income tax rates page confirms the personal allowance stays frozen at £12,570. The higher-rate threshold is £50,270. Fiscal drag pushes more taxpayers into the higher-rate band every year — and each one sees their PSA halved overnight from £1,000 to £500. A £2,000 pay rise that crosses £50,270 doesn't just cost you 40% tax on that slice — it costs you £500 of savings allowance too.

The cash ISA rate penalty has almost vanished. Here are the top rates from MoneySavingExpert's best-buy tables as of April 2026:

Easy access:

• Best cash ISA: Prosper 4.7% (£10,000+ min), Trading 212 4.58% (£1 min)
• Best savings account: 4.75% (includes 1yr newbie bonus), Chase 4.5% (no bonus)

One-year fixed:

• Best fixed ISA: 4.5% (First Direct, needs current account), 4.4% (Bath Building Society, open to all)
• Best fixed savings: Vida Savings 4.6%

Two-year fixed:

• Best fixed ISA: 4.46% (Buckinghamshire Building Society)
• Best fixed savings: Vida Savings 4.61%

The easy access gap is 0.05 percentage points. On £20,000, that's £10 a year. The fixed-rate gap is wider — 0.15 to 0.20 points — but still negligible against the tax savings.

A higher-rate taxpayer holding £20,000 in the best savings account at 4.75% keeps just £570 after 40% tax (once their £500 PSA is used). The same money in a cash ISA at 4.7% delivers £940 — £370 more. The "lower" ISA rate wins by a mile. For more on individual providers, see our cash ISA rates guide.

From 6 April 2027, the annual cash ISA allowance for anyone under 65 falls from £20,000 to £12,000. Over-65s keep the full allowance. The ISA rules on gov.uk confirm the current £20,000 ceiling applies through 2025/26.

The stated aim is to push savers toward stocks and shares ISAs. The government wants your money in UK equities, not earning 4.7% in cash. But cash held inside an ISA wrapper before the reform stays sheltered permanently. Every pound contributed before April 2027 keeps its tax-free status regardless of future rule changes.

That creates a two-year sprint. You have this tax year (ending 5 April 2026) and next (2026/27) to contribute £20,000 annually to a cash ISA. From 2027/28, that ceiling falls to £12,000. A couple both maxing their cash ISAs this year and next shelter £80,000 before the door narrows.

Reports also suggest HMRC is considering a 22% charge on interest from cash or money-market funds held inside stocks and shares ISAs — closing the loophole where savers park cash in an S&S ISA to maintain the £20,000 ceiling. If that materialises, the genuine cash ISA wrapper becomes even more valuable for tax-free cash savings. For background on the broader ISA landscape, see our ISA hub page.

Both cash ISAs and regular savings accounts carry identical FSCS protection — up to £85,000 per person, per banking licence. If your provider fails, you get your money back within seven working days.

The protection limit is per banking licence, not per account. Multiple accounts with brands sharing the same licence (e.g. Halifax and Bank of Scotland are both Lloyds Banking Group) share the £85,000 cap. Spreading £100,000 across a cash ISA and savings account at the same bank gives you £85,000 of protection, not £170,000.

For couples, each person gets their own £85,000 limit — £170,000 of joint protection per licence. If you're holding more than £85,000 with one provider, split across banking groups. The FSCS website lets you check which brands share a licence.

One wrinkle: some app-based ISA providers (like Chip) hold deposits with a backing bank (ClearBank is common). If you have accounts with multiple brands that use the same backing bank, your £85,000 limit covers all of them combined. Check before opening.

The PSA resets every April. Your cash ISA balance is tax-free forever.

Put £20,000 into a cash ISA every year for five years: £100,000 generating completely tax-free interest. At 4.7%, that's £4,700 a year — every penny yours. The same £100,000 in a regular savings account generates £4,750 gross, but HMRC takes £1,900 (higher rate) or £750 (basic rate after the first £1,000 PSA).

Over ten years of maxing out the allowance:

A higher-rate taxpayer who maxes their cash ISA for a decade saves £3,760 in tax annually by year ten — £37,600 of cumulative savings over the period. That calculation assumes flat rates; if the BoE holds at 3.75% or cuts further, provider rates will follow — but the tax saving scales proportionally regardless.

The ISA allowance is use-it-or-lose-it. Miss a year and that £20,000 of tax-free space is gone permanently. For those considering alternatives, our Premium Bonds comparison shows how NS&I stacks up.

Open a cash ISA now if any of these apply:

• You're a higher-rate taxpayer (income over £50,270) — your £500 PSA runs out at just £10,638 of savings at 4.7%
• You're a basic-rate taxpayer with total savings above £21,000 across all non-ISA accounts
• You have savings between £10,000 and £21,000 and expect a pay rise, inheritance, or bonus within two years
• You want to lock in £20,000 of annual ISA space before the 2027 reform cuts it to £12,000
• You're an additional-rate taxpayer (income over £125,140) — you get zero PSA and pay 45% on every penny of interest

A regular savings account is fine if all three apply:

1. Total savings under £15,000 across all accounts
2. Basic-rate taxpayer with no realistic prospect of earning over £50,270 in the next three years
3. No plans to save beyond £15,000 in the foreseeable future

The cost of opening a cash ISA when you don't strictly need one: £10 of forgone interest per year on £20,000. The cost of not having one when circumstances change: hundreds per year in tax, compounding indefinitely, with no way to retrospectively claim skipped allowances.

Still weighing cash against equities? Our stocks and shares ISA comparison covers the risk-return tradeoff, and the savings hub has the full picture.

The 2025/26 tax year ends on 5 April 2026. Your £20,000 ISA allowance expires with it.

Higher-rate taxpayers (income £50,270+): Open a cash ISA today. Your PSA is only £500 — at 4.7%, just £10,638 of regular savings uses it up. The ISA wrapper saves you real money from day one. With the 2027 reform cutting your future allowance to £12,000, this is one of only two years you can contribute the full £20,000.

Basic-rate taxpayers with £20,000+ in savings: Same answer. You're at or near your PSA limit and the ISA protects future growth. Pre-reform contributions lock in the higher ceiling permanently.

Basic-rate taxpayers with under £20,000: Still open one. The PSA covers you today, but you're staking a claim on tax-free space that compounds in value. At 4.7%, the rate sacrifice versus a regular savings account is £10 a year.

If you hold an older cash ISA paying a poor rate, a cash ISA transfer moves your money without losing tax-free status. Don't withdraw and redeposit — that uses up this year's allowance.

For the fixed vs easy access decision, consider whether the BoE cuts again. Markets expect at least one more cut in 2026, which would drag easy access rates lower — locking in 4.5% fixed for a year looks defensive.

Two years of £20,000. Then the ceiling drops. Don't waste this one.

This article is for informational purposes only and does not constitute financial advice. You should seek independent financial advice before making any investment decisions.