The issue is becoming more prominent as interest rates on savings products remain relatively high and ISA rules are due to change from April 2027. Savers are already shifting substantial sums into tax-free accounts, while the number of ordinary savings accounts potentially generating taxable interest has risen sharply.
Higher Rates Are Pushing More Savings Interest into the Tax Net
According to Moneyfacts, the number of savings and ISA products available has risen to 2,617. Average easy-access savings rates stand at 2.53%, compared with 2.72% for easy-access ISAs, while average one-year fixed rates are 4.23% for ordinary savings accounts and 4.24% for ISAs.
Those returns can create a tax liability for people holding larger balances outside an ISA. Basic-rate taxpayers can currently earn up to £1,000 in savings interest each year without paying tax, while the allowance falls to £500 for higher-rate taxpayers. Additional-rate taxpayers receive no Personal Savings Allowance.
A saver with £20,000 would earn about £848 over a year at the average one-year ISA rate, according to Moneyfacts analyst Caitlyn Eastell. The equivalent non-ISA account would generate about £846.
For a higher-rate taxpayer who has a £500 Personal Savings Allowance, the difference becomes more substantial once tax is applied. The ISA holder would retain the full £848, while the saver using the non-ISA account would keep about £708, leaving the ISA saver roughly £138 better off.
The number of accounts potentially affected has expanded alongside higher rates. CACI figures cited by Yorkshire Building Society show that around 5.3 million non-ISA savings accounts are now forecast to generate more than £1,000 of annual interest. That compares with about 462,000 accounts in January 2018 and 2.5 million in January 2023.
The Financial Conduct Authority has also found that people typically hold between three and five savings products across two to three providers, meaning some savers may not immediately realise that their combined interest has moved beyond the relevant tax-free allowance.
Cash ISA Balances Rise before New Rules Take Effect
Cash ISA balances have already increased markedly ahead of changes scheduled for April 2027. According to Paragon Bank, adult Cash ISA balances rose by £38 billion between January and May 2026, with the average balance increasing from £17,264 to £17,848. Fixed-term ISAs accounted for £28.8 billion of that rise, taking balances in those products to £269.9 billion. Instant-access ISA balances increased by £9.6 billion to £203.5 billion.
From April 2027, the annual Cash ISA allowance for people under 65 is due to fall from £20,000 to £12,000. Those aged 65 and over will retain a £20,000 Cash ISA limit, while the overall allowance for Stocks and Shares and Innovative Finance ISAs will remain at £20,000.
The changes will also introduce a 22% charge on interest earned from cash held inside non-cash ISAs. Transfers from non-cash ISAs into Cash ISAs will no longer be permitted for people under 65, while transfers in the opposite direction will remain possible.
With more savings interest potentially becoming taxable and the Cash ISA framework changing next year, the figures show why account type now matters alongside the headline rate. For some savers, the difference between taxable and tax-free interest can already amount to more than £100 a year.
