For years, sheltering savings from tax meant using an ISA. Then the Personal Savings Allowance arrived and changed the picture, letting most people earn interest tax free outside any wrapper. Knowing your allowance can save you from paying tax you do not owe — or from using an ISA you do not need.
How much you can earn tax free
- Basic-rate taxpayers can earn £1,000 of savings interest a year with no tax.
- Higher-rate taxpayers get a smaller allowance of £500.
- Additional-rate taxpayers get no allowance at all.
Only interest above your allowance is taxed, and HMRC usually collects it by adjusting your tax code rather than sending a bill.
What this means in practice
With savings rates where they are, £1,000 of tax-free interest takes a fair-sized balance to reach. So a basic-rate taxpayer with modest savings may pay no tax on interest whatever account they use — which means a normal savings account paying a higher rate can beat a cash ISA paying less.
When the ISA still wins
The allowance does not make ISAs pointless. They matter when:
- Your interest is likely to exceed the allowance now or in future.
- You are a higher or additional-rate taxpayer with a small or no allowance.
- You want to keep the money permanently sheltered as it grows.
The takeaway
Check whether your interest actually exceeds your allowance before assuming you need a tax wrapper. For many savers, the best account is simply the one paying the highest rate — tax never enters into it.