Savings investors may be at risk of paying taxes on their interest due to competitive interest rates
We contrast the benefits and drawbacks of cash ISAs with other savings accounts following the Autumn Budget's announcement of changes to cash ISAs and the tax rate on savings interest.
The risk of being taxed on savings is increasing due to an ongoing freeze on tax bands and allowances, and savers face more difficulties in the future.
Chancellor Rachel Reeves extended the income tax threshold freeze to 2030/31 in the 2025 Autumn Budget, which will force more people into higher tax brackets as incomes rise. In addition, the tax rates on savings income will increase starting in April 2027, and individuals under 65 will only be able to contribute £12,000 annually to cash ISAs (instead of up to £20,000).
According to HMRC data obtained by AJ Bell through a Freedom of Information request in August 2025, approximately 2.64 million people are anticipated to pay tax on their savings in the 2025 - 2026 tax year. In 2021 - 2022, only 647,000 people were impacted.
897,000 higher-rate taxpayers and 1.15 million basic-rate taxpayers are included in this.
According to AJ Bell, it means that approximately one in eight higher-rate taxpayers and one in twenty-five basic-rate taxpayers will have to pay taxes on their savings this tax year.
Why do more savers have to pay taxes on their interest?
Due to lower levels of inflation and 14 consecutive base rate increases between December 2021 and August 2023, savings accounts have become much more appealing in recent years. Even though interest rates are currently declining, the average easy access savings account paid 2.44 percent at the end of January 2026, which is 1.85 percentage points more than the average rate paid at the beginning of January 2020, which was 0.59 percent.
An increasing number of savers are at risk of paying taxes on their savings interest due to rising interest rates and frozen tax allowances.
Cash ISAs are a tax-free savings vehicle, which makes them a helpful way to shield interest on savings from the taxman, even though you can earn some interest in traditional savings accounts without being taxed.
These tax-free wrappers had become less popular in recent years as many savers found themselves well within the personal savings allowance threshold due to the pitiful interest rates offered by all account types.
"For years, most savers didn't give a second thought to paying tax on their interest rates because the personal savings allowance offered a generous cushion," stated Laura Suter, director of personal finance at AJ Bell, to BFIA. However, the terrain has changed quickly.
Many people are now being drawn into the tax system for the first time due to a number of factors, including rising interest rates, frozen tax thresholds, more people being forced into higher tax bands, and years of cash ISAs being disregarded. A "
Allowances are taxed on savings.
If a taxpayer's personal allowance (usually 12,570) hasn't been spent on other sources of income, like wages or a pension, they can use it to earn interest tax-free. Your personal allowance decreases by one for every two dollars over 100,000, so if your income is 125,140 or more, you would lose it completely.
The starting rate for savings is up to £5,000 in interest that can be earned by certain individuals without paying taxes. For each additional income over the personal allowance, this allowance decreases by one. Individuals earning £17,570 or more are not eligible for this benefit.
The personal savings allowance shields a portion of the savings interest from the tax collector.
Higher-rate taxpayers (taxable income of 50,271 to 125,140) have a personal savings allowance of 500, whereas basic-rate taxpayers (taxable income of 12,571 to 50,270) can earn 1,000 in interest tax-free through this allowance. Because additional-rate taxpayers (those with taxable income exceeding £125,140) are not eligible for any personal savings allowance, all interest earned is subject to taxation.
According to Paragon Bank's analysis of CACI data in November 2025, 516 billion held in 5.2 million non-ISA adult savings accounts would produce enough interest to exceed the personal savings allowance (PSA) for basic-rate taxpayers.
Which pays more, cash ISAs or traditional savings accounts?
The top rate for a one-year fixed savings account is currently 4 percent AER/gross, which is significantly higher than the interest rates offered on the best savings accounts five years ago. The highest-paying easy access account pays 4.5 percent AER/4.41 percent gross (bonus included). Rates are accurate as of the time of writing and based on Moneyfactscompare . co . uk.
The highest-paying one-year fixed ISA offers a rate of 4.15 percent AER/gross, while the top variable cash ISA pays 4.39 percent AER/4.3 percent gross. The best cash ISA rates also pay more than 4 percent.
In January 2026, there were 1,661 savings accounts available (not including cash ISAs), up from 1,542 the previous year. In the meantime, the Moneyfacts UK Savings Trends Treasury Report states that there were 657 cash ISAs available, down from 574 in January 2025.
In January, the average easy access savings account (not including ISAs) paid 2.48 percent, compared to 2.89 percent during the same period the previous year. Additionally, the average easy access cash ISA rate has decreased year over year, from 3.03 percent to 2.69 percent.
We examine the factors savers should take into account when choosing between an ISA and a traditional savings account.
A traditional savings account's advantages.
Although money kept in a traditional savings account isn't tax-free, there are ways to earn interest on it without having to pay taxes.
The best savings accounts can appear more appealing when their rates are higher than those of tax-free cash ISAs.
Traditional savings accounts typically don't have a cap on the amount you can save, in contrast to ISAs.
The Financial Services Compensation Scheme only protects the first £120,000 saved in each financial institution in the event that it fails, but you can typically deposit as much as you like into the account. Using their bank and savings protection checker, you can determine whether the FSCS is protecting your savings, whether they are in a traditional account or a cash ISA.
Conventional savings account drawbacks.
You're much more likely to have to give the taxman a portion of your earnings once you start to accumulate a larger savings pot, especially if you pay higher taxes.
According to BFIA's calculations, higher-rate taxpayers would be required to pay income tax on their interest once they have slightly more than 11,100 in the current top easy access account, assuming the account paid 4.5% annually. In an account with this rate, basic rate taxpayers could save just over £22,200 before their savings interest is taxed.
A rise in interest rates would result in more people with traditional savings accounts having their returns taxed because they would be earning more than their personal savings allowance.
Many people won't realize they're going over the tax-free limit, according to Suter of AJ Bell.
"Income earned must be declared by self-assessment filers, but for those on PAYE, HMRC will get the information straight from their paystub by changing their tax code," she stated.
"When people notice a sudden decline in their take-home pay, it can be a nasty surprise.
Advantages of an ISA.
With ISAs, you can invest or save completely tax-free.
For the fiscal year 2025 - 2026, the annual ISA allowance is currently set at £20,000.
The annual ISA allowance covers deposits into all of these options per tax year, though there are other types of ISAs available.
ISA cash.
If you're a saver seeking low-risk certainty, you can invest in a cash ISA, which functions similarly to a conventional savings account but guarantees tax-free interest.
Shares and stock ISAs.
If you're willing to take on a bit more risk in exchange for the potential for greater returns, you might want to consider an ISA for stocks and shares.
Depending on the provider, different investment types can be held in an ISA for stocks and shares. However, it enables savers to benefit from all of the returns produced by individual stocks, funds, bonds, and similar securities without having to pay capital gains or dividend taxes.
Lifetime ISAs.
Another kind of ISA is the Lifetime ISA (LISA), which is intended for two different kinds of savers: those who wish to save for retirement or those who want to accumulate a deposit to use when buying a home.
Up to 4,000 can be deposited into an LISA by qualified savers each tax year; this amount is deducted from the 20,000 annual ISA allowance.
The government offers a 25 percent annual bonus on the funds you save in a Lifetime ISA, with a maximum bonus of £1,000. A Lifetime ISA can only be opened by those under 40, and if you use it to save for retirement, you won't be able to access the money until you're 60 without paying a penalty.
To assist first-time homebuyers, the chancellor declared that the government would release a consultation in "early 2026" regarding the introduction of a new, more straightforward ISA product. In lieu of the Lifetime ISA, this would be provided.
Innovative finance ISAs.
Peer-to-peer loans (or cryptocurrency ETNs starting in April) can be invested in using the Innovative Finance ISA, another type of investment ISA.
Younger ISAs.
For kids, there is a tax-free savings account called a Junior ISA (JISA).
In a Junior ISA, parents can set aside money for their kids, but the child owns the money. When the child turns sixteen, they are able to take control of the account, but they cannot take money out of it until they are eighteen.
The maximum amount that can be deposited into a Junior ISA in a single tax year is 9,000.
Junior ISAs come in two varieties: cash and stocks and shares. One or both of these types may be present in a child.
How much can be invested in a cash ISA?
Each tax year, you are able to transfer your ISA savings as well as deposit up to £20,000. If an account permits transfers, you might profit from transferring ISA funds from prior years to ISAs with higher interest rates. You are maintaining your tax-free status by transferring the ISA savings.
It is not possible to carry over any unused ISA allowance to subsequent years. That unused allowance is therefore permanently lost if you contribute less than £20,000 to an ISA during any given tax year. If you suddenly get a windfall, like a sizable bonus or an inheritance, this could be annoying.
Beginning on April 6, 2027, individuals under 65 can only contribute £12,000 per year to cash ISAs. This is covered by the total 20,000 ISA cap. Lifetime ISAs will continue to have an annual subscription cap of 4,000.
If you are 65 years of age or older, you are still able to contribute up to £20,000 per tax year to a cash ISA.
Prior to April 6, 2024, you could only open one of each major ISA type during a single tax year.
In a single tax year, savers can now open and fund multiple ISAs of the same kind, such as multiple cash ISAs.
Moneyfactscompare . co . uk personal finance analyst Caitlyn Eastell stated that cash ISAs are "one of the best options for those wanting to avoid an unexpected tax bill" and that they are very popular among savers.
"The last chance for savers under 65 to maximize their 20,000 cash ISA allowance is the upcoming 2026/27 tax year, which could lead to a very competitive ISA season, but the rate war peak isn't usually until around March and April," she stated.
"This might encourage some savers to take a wait-and-see strategy, but since savings rates are expected to decline this year, attempting to time the market could actually make them worse off. Over the next few months, savers should frequently check their rates to make sure they're getting a good deal and avoid missing out. The "
Disadvantages of an ISA.
Even though ISA returns are tax-free, using them doesn't always mean you'll benefit. There is a chance that the assets you invest in could depreciate if you choose an investment ISA (the stocks and shares ISA or the innovative finance ISA), just like with regular investment accounts. You might therefore wind up with less than you began with.
It can be difficult to transfer funds between ISAs. Inward transfers are not accepted by all ISAs. This implies that you are unable to transfer funds from an ISA into them. This may result in fewer options when it comes to locating a new residence for your savings. In addition, the funds must be moved straight between ISAs to maintain their tax-free status.
The £20,000 annual ISA allowance will be applied to any withdrawals from an ISA, even if they are made to be deposited into another ISA. ISA transfers aren't included.
ISAs and traditional savings accounts.
The use of both traditional savings accounts and ISAs is unrestricted. To be honest, this will make sense to some savers.
For instance, your annual ISA allowance of £20,000 need not be the limit on your savings if you have used it all. You can keep saving for the remainder of the tax year in a traditional savings account after you reach that threshold.
"When savers are trying to grow their cash faster than inflation, traditional savings accounts tend to offer better rates, which can be crucial," stated Eastell.
For individuals who are unlikely to find themselves going over their personal savings allowance, these might be a better choice. To help them choose the best account for their needs, savers should ultimately be fully aware of the tax ramifications. A "
Dividing the money you're saving according to the interest rates offered on various accounts and whether you need to access it in the near or long term may also make sense.
Discover More about HM Revenue and Customs.
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