Are ISAs worth it?

Since the introduction of the Personal Savings Allowance (PSA) in 2016, some people have questioned the value of Cash ISAs, asking themselves: is it worth having an ISA when I may be able to earn interest tax-free with a PSA?  

It really depends on the individual and their circumstances. Even with PSAs, ISAs are still a good option for many people.  

There are three key benefits to ISAs, including:   

1. Longer-term savings 
2. Tax-efficient inheritance 
3. Reduction of risk around interest rates 

We outline the Personal Savings Allowance and why ISAs are still an attractive option below.  

The Personal Savings Allowance (PSA) is the amount of interest you can earn on your savings tax-free each tax year, excluding ISAs. Basic rate taxpayers can earn £1,000, higher rate taxpayers £500, while additional rate taxpayers are not eligible. If you’ve earnt interest on an account that isn’t an ISA and you’ve exhausted your Personal Allowance and your starting rate for savings, you’ll need to pay tax.

For more information, visit our Personal Savings Allowance page. 

1. Better option for long-term savings 

The tax-free benefits of an ISA go beyond one year. The current ISA limit allows you to save up to £20,000 each year. You can continue to earn tax-free savings on this for years to come and increase your balance by topping it up every year.  

If you regularly save the maximum in an ISA, you could soon earn a considerable amount of interest. But thanks to ISAs' tax-free benefit, you won't pay any tax — even if the interest you earn exceeds the PSA limit. 

For more in-depth information about the Cash ISA Allowance, visit our Cash ISA allowance for 2024/2025 page. 

2. Couples can inherit each other’s ISA Allowance 

ISAs can be more tax-efficient than other Savings Accounts when it comes to inheritance. 

Married couples or those in civil partnerships can inherit their partner’s ISA Allowance. This means the surviving partner can save a larger amount in an ISA without paying tax. 

For example, if a person had £60,000 worth of ISA assets, their widow(er)'s ISA Allowance would increase by £60,000. This even applies if the surviving spouse is not inheriting the ISA assets.  

So, if the deceased partner had left their ISA funds to their child, the partner would still be entitled to increase their ISA Allowance by the same amount. However, they would need to fund it separately by paying the equivalent sum into an ISA in their sole name. 

The bereaved spouse can claim an increased ISA Allowance up to three years after the date of the death of their partner, or if longer, 180 days after the estate has been administered. 

3. Eliminates risks associated with rising interest rates 

If interest rates rise, you could exceed your PSA and become liable for tax. 

Saving your money in an ISA will mean you can be sure that you will not be charged tax (providing that you do not exceed your Annual ISA Allowance of £20,000). 

Saving with an ISA guarantees that any interest will remain tax-free no matter how high the interest rates rise. 

These are just some of the reasons why ISAs can be an attractive savings choice.