ISAs are treated as automatically superior, but since the personal savings allowance arrived, most savers pay no tax on ordinary interest anyway. The real answer depends on your balance, your tax band and your future.
The Personal Savings Allowance
Basic-rate taxpayers earn £1,000 of interest tax-free per year; higher-rate, £500; additional-rate, £0. At 4.5% interest, a basic-rate taxpayer needs over £22,000 in ordinary savings before any tax is due. Below that, simply pick the best rate anywhere — the wrapper is irrelevant.
When the ISA Wins
- Bigger balances: above the allowance threshold, ISA interest stays tax-free forever
- Higher earners: the £500/£0 allowances make wrappers valuable much sooner
- The long game: ISA money compounds tax-free for decades and never appears on a tax return — £20,000/year of allowance is use-it-or-lose-it
- Stocks & shares: outside a wrapper, dividends and gains are taxable above tiny allowances (£500 dividend, £3,000 CGT) — investing is where ISAs earn their keep
The Practical Strategy
Emergency fund: best easy-access rate, wrapper optional. Serious long-term money: fill the ISA. And always check the rate — a 4.8% ordinary account beats a 3.9% Cash ISA for a basic-rate saver under the allowance every single time.
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