Savings Accounts or Cash ISAs – which pays the highest interest?

Ever since 1999 when ISAs were first introduced people were encouraged to use their tax free allowance first before thinking of putting cash in a standard savings account to ensure they made the most of the tax free benefits.

However things have changed, particularly since the Personal Savings Allowance was introduced where basic rate taxpayers can now earn £1000 of interest per year without paying any tax and additional rate taxpayers (earning over £45k pa) also benefit albeit a lower annual PSA limit of £500 tax free.

The rates on standard savings accounts are better than their ISA counterparts so for those who will be well inside their PSA limit then a standard savings account makes better financial sense.

Table 1 – Proof that Best Buy Standard Savings Accounts currently offer better returns than ISAs (Annual Interest earned figure based on balance of £20,000)

Term	ISA		Interest per year	Standard Savings		Interest per year
Instant Access	Coventry B S	1.05%	£210	RCI Bank	1.10%	£220
Instant Access	NatWest	1.01%	£202	Skipton B S	1.02%	£204
Instant Access	Skipton B S	1.00%	£200	Charter Savings Bank	1.01%	£202
1 Yr Fix	Bank of Cyprus UK	1.13%	£226	Paragon Bank	1.51%	£302
18m Fix	Principality B S	1.40%	£280	Charter Savings Bank	1.52%	£304
2 Yr Fix	Yorkshire B S	1.25%	£250	Principality B S	1.80%	£360
3 Yr Fix	Principality B S	1.85%	£370	Secure Trust Bank	2.00%	£400
5 Yr Fix	Principality B S	1.95%	£390	Ikano Bank	2.35%	£470

Rates correct as at 10.04.2017

For those with bigger balances they have the option to use the PSA in full and then put up to an extra £20k in a Cash ISA.

One of the big benefits of a Cash ISA is that the money keeps it’s tax free status for future years too.

It’s a bit more tricky these days deciding whats best – but this handy table should give you an idea of how much interest income you will earn and so help you choose the right course of action.

Table 2 . Annual savings interest dependent on balance and interest rate

	£5,000	£15,000	£25,000	£40,000	£60,000
1.50%	£75	£225	£375	£600	£900
2.00%	£100	£300	£500	£800	£1,200
2.50%	£125	£375	£625	£1,000	£1,500
3.00%	£150	£450	£750	£1,200	£1,800
4.00%	£200	£600	£1,000	£1,600	£2,400
5.00%	£250	£750	£1,250	£2,000	£3,000
6.00%	£300	£900	£1,500	£2,400	£3,600

There are three variables to consider – The size of your savings balance, your interest rate and your PSA limit – once you have this information you can make the decision that works best for you.