ISA vs Regular Savings Account UK: Which is Better in 2025?

Should you choose a Cash ISA or regular savings account in 2025? The answer depends on your income, savings amount, and the interest rates available. While ISAs offer tax-free interest, regular savings accounts often pay higher rates—and basic rate taxpayers get £1,000 tax-free interest anyway through the Personal Savings Allowance.

In this guide, we'll compare ISAs and regular savings accounts with real examples, help you calculate which saves you more money, and show you how to use our savings calculator to find your best option.

Compare ISA vs Regular Savings with Our Calculator →

What is a Cash ISA?

A Cash ISA (Individual Savings Account) is a savings account where you pay no tax on the interest you earn. Every UK adult gets a £20,000 ISA allowance each tax year (6 April to 5 April), which you can use across different ISA types.

Key features of Cash ISAs:

• £20,000 annual allowance for the 2025/26 tax year
• Tax-free interest on all earnings (no income tax charged)
• FSCS protected up to £120,000 per institution (from 1 December 2025)
• Flexible or fixed options available (flexible ISAs allow withdrawals and re-deposits)

Current best Cash ISA rates (December 2024):

• Easy access Cash ISA: 4.52% AER (Trading 212)
• 1-year fixed Cash ISA: 4.30% AER (Tembo via Investec)

Important change coming: From April 2027, savers under 65 will be limited to £12,000 in Cash ISAs only (£20,000 allowance remains, but max £12k in cash).

Personal Savings Allowance Explained

Before comparing ISAs to regular savings, you need to understand the Personal Savings Allowance (PSA)—the amount of interest you can earn tax-free on regular savings accounts.

Personal Savings Allowance rates (2025/26):

Income Tax Band	PSA Allowance	Tax on Interest Above PSA
Basic rate (£12,571-£50,270)	£1,000/year	20%
Higher rate (£50,271-£125,140)	£500/year	40%
Additional rate (£125,140+)	£0/year	45%

How it works:

If you're a basic rate taxpayer earning £500 in savings interest, you pay £0 tax (within your £1,000 PSA).

If you're a higher rate taxpayer earning £800 in interest, you pay £120 tax (£300 × 40% on the amount above your £500 PSA).

Calculate Your Tax-Free Interest →

When Does a Cash ISA Make Sense?

Cash ISAs are most beneficial for:

1. Higher and Additional Rate Taxpayers

If you earn over £50,270, your PSA drops to £500 (or £0 for additional rate taxpayers). Any interest above this is taxed at 40-45%.

Example: You have £20,000 savings at 4.5% = £900 interest per year.

• Regular savings account: £900 interest - £500 PSA = £400 taxable × 40% = £160 tax (you keep £740)
• Cash ISA at 4.3%: £860 interest, £0 tax (you keep £860)

ISA wins by £120 even with a lower rate, because you avoid the 40% tax.

2. Large Savings Balances (Basic Rate Taxpayers)

Even basic rate taxpayers with £1,000 PSA can exceed it with large balances.

Example: You have £30,000 savings at 4.5% = £1,350 interest per year.

• Regular savings: £1,350 - £1,000 PSA = £350 taxable × 20% = £70 tax (you keep £1,280)
• Cash ISA at 4.3%: £1,290 interest, £0 tax (you keep £1,290)

ISA wins by £10 (and the gap widens as your savings grow).

3. Future-Proofing

If your income increases during the year (promotion, bonus, side income), you could move from basic to higher rate, cutting your PSA from £1,000 to £500 mid-year. Cash ISA interest is always tax-free regardless of income changes.

When Regular Savings Are Better

Regular savings accounts often make more sense for:

1. Basic Rate Taxpayers with Smaller Balances

If you're earning £12,571-£50,270 and have less than £20,000 saved, your £1,000 PSA likely covers all your interest.

Example: You have £10,000 savings at 4.5% = £450 interest per year.

• Regular savings: £450 interest - £1,000 PSA = £0 tax (you keep £450)
• Cash ISA at 4.3%: £430 interest, £0 tax (you keep £430)

Regular savings wins by £20 because you're not paying tax anyway, so the higher rate is better.

2. Regular Saver Accounts (Short-Term)

Regular saver accounts pay much higher rates (6-7.5%) but require monthly deposits and limit balances to £2,400-£3,600 per year.

Example: You save £200/month in a 7% regular saver (12 months).

• Regular saver at 7%: Average balance ~£1,200, interest ~£84, £0 tax (well within £1,000 PSA)
• Cash ISA at 4.3%: Same deposits, interest ~£52

Regular saver wins by £32—the 7% bonus rate beats the 4.3% ISA even before tax.

3. When You Need Easy Access

Some Cash ISAs restrict withdrawals (you lose the tax-free benefit if you withdraw and re-deposit in a fixed ISA). Regular savings accounts offer more flexibility—though flexible Cash ISAs solve this.

Model Your Savings Strategy →

Real Comparison Examples

Example 1: £30,000 Earner (Basic Rate) with £5,000 Savings

Income: £30,000 (basic rate taxpayer, £1,000 PSA)

Option A: Regular savings at 4.52%

• Interest: £5,000 × 4.52% = £226/year
• Tax: £0 (within £1,000 PSA)
• You keep: £226

Option B: Cash ISA at 4.30%

• Interest: £5,000 × 4.30% = £215/year
• Tax: £0 (ISA)
• You keep: £215

Winner: Regular savings (£11 more per year). With such a small balance, the higher rate on regular savings beats the ISA.

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Example 2: £60,000 Earner (Higher Rate) with £15,000 Savings

Income: £60,000 (higher rate taxpayer, £500 PSA)

Option A: Regular savings at 4.52%

• Interest: £15,000 × 4.52% = £678/year
• Tax: (£678 - £500) × 40% = £71 tax
• You keep: £607

Option B: Cash ISA at 4.30%

• Interest: £15,000 × 4.30% = £645/year
• Tax: £0 (ISA)
• You keep: £645

Winner: Cash ISA (£38 more per year). Despite the lower rate, avoiding 40% tax on £178 saves you money.

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Example 3: £100,000 Earner (Higher Rate) with £20,000 Savings

Income: £100,000 (higher rate taxpayer, £500 PSA)

Option A: Regular savings at 4.52%

• Interest: £20,000 × 4.52% = £904/year
• Tax: (£904 - £500) × 40% = £162 tax
• You keep: £742

Option B: Cash ISA at 4.30%

• Interest: £20,000 × 4.30% = £860/year
• Tax: £0 (ISA)
• You keep: £860

Winner: Cash ISA (£118 more per year). The tax saving is substantial at higher balances and income levels.

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Summary Table

Income	Savings	Regular Savings (4.52%)	Cash ISA (4.30%)	Winner
£30,000	£5,000	£226 (£0 tax)	£215 (£0 tax)	Regular +£11
£60,000	£15,000	£607 (£71 tax)	£645 (£0 tax)	ISA +£38
£100,000	£20,000	£742 (£162 tax)	£860 (£0 tax)	ISA +£118

Best of Both Strategy

You don't have to choose just one—combine both for maximum returns:

1. Use regular saver accounts first (7% for 12 months on £200-£300/month deposits)
2. Fill your Cash ISA with larger lump sums if you're a higher rate taxpayer or have >£20k
3. Keep emergency funds in easy access regular savings (4.52%) if you're basic rate and within your £1,000 PSA
4. Switch to Cash ISA as you approach PSA limit (e.g., when your savings grow to £22k+ at 4.5% = £990 interest)

Example combined strategy (basic rate taxpayer):

• £200/month in 7% regular saver = £2,400/year + £84 interest
• £10,000 in 4.52% easy access = £452 interest
• Total interest: £536 (£0 tax, well within £1,000 PSA)

Learn more about maximizing returns in our compound interest guide.

Plan Your Savings Growth →

Frequently Asked Questions

1. Can I have both an ISA and regular savings account?

Yes, absolutely. There's no restriction on having both. You can put up to £20,000 in ISAs per tax year and unlimited amounts in regular savings accounts.

2. Do I lose my ISA allowance if I don't use it?

Yes, ISA allowances don't roll over. If you don't use your £20,000 allowance this tax year (by 5 April 2026), you can't carry it forward to next year.

3. Can I transfer from a regular savings account to an ISA?

Yes, but it uses your ISA allowance. Transferring £10,000 from regular savings to a Cash ISA counts as £10,000 of your £20,000 allowance for that tax year.

4. Is ISA interest really completely tax-free?

Yes, 100% tax-free. You never pay income tax on Cash ISA interest, regardless of how much you earn or how much interest you receive. You also don't need to report it on your tax return.

5. What happens if I earn more interest than my Personal Savings Allowance?

HMRC will collect the tax automatically if you're employed (via adjusted tax code) or through Self Assessment if you're self-employed. You'll pay 20%, 40%, or 45% depending on your income tax band.

6. Can I withdraw money from a Cash ISA and put it back?

Only with flexible Cash ISAs. Flexible ISAs let you withdraw and replace money in the same tax year without losing your allowance. Fixed-rate ISAs usually don't allow this—check before opening.

7. Do joint accounts get double the Personal Savings Allowance?

No, joint accounts split interest 50/50 for tax purposes. If a joint account earns £1,600 interest, each person is treated as earning £800—both within a basic rate taxpayer's £1,000 PSA.

8. Are ISAs better than premium bonds?

It depends. Premium bonds are tax-free (like ISAs) but offer prizes instead of guaranteed interest. The average prize rate is 4.15%—similar to Cash ISAs—but you might win nothing. Compare both options in our savings calculator.

9. Should I use my full £20,000 ISA allowance every year?

Only if it makes financial sense. If you're a basic rate taxpayer with £15,000 savings earning £675 interest (within your £1,000 PSA), regular savings at 4.52% beats a Cash ISA at 4.30%. Don't use ISAs just to use them—use our calculator to check.

10. What's the £12,000 Cash ISA limit in 2027?

From April 2027, under-65s can only put £12,000 in Cash ISAs (the remaining £8,000 must go to Stocks & Shares ISAs, Lifetime ISAs, or Innovative Finance ISAs). This change aims to encourage investment over cash savings.

Related Resources

Want to save £10,000 in the next 12 months? Read our practical £10k savings challenge guide with week-by-week strategies.

Already have savings? Learn how compound interest can grow your wealth over 5, 10, or 20 years.

Take Action: Calculate Your Best Option

The ISA vs regular savings decision depends on your income, savings amount, and the rates available right now. Don't guess—calculate.

Use our free savings calculator to:

✅ Compare ISA and regular savings returns side-by-side ✅ See exactly how much tax you'll pay based on your income ✅ Model different scenarios (lump sum vs regular deposits) ✅ Find out when you'll exceed your Personal Savings Allowance

Start calculating now and make sure every pound of your savings works as hard as possible.

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Disclaimer: This guide uses 2025/26 tax year rates and allowances. ISA allowance: £20,000. Personal Savings Allowance: £1,000 (basic rate), £500 (higher rate), £0 (additional rate). Savings rates are accurate as of December 2024 and change frequently—always check current best-buy tables before opening an account. This information is for educational purposes only and should not be considered financial advice.

Sources:

• HMRC: Individual Savings Accounts (ISAs)
• GOV.UK: Tax on Savings Interest
• Moneyfacts: Best Cash ISA Rates
• MoneySavingExpert: ISAs vs Regular Savings