Hopefully this isn't a silly question...

CaraDelMono

...well I'm sure it is but I'm a bit clueless.

How is tax deducted from savings? If I have a current account that I keep all my money in which pays a decent rate of interest, will I be taxed on that, or is it just regular savings account that are taxed? What is the benefit of saving money in an ISA rather than keeping it in my current account?

neilp

20% of interest is automatically deducted as tax from all interest paying accounts except those where interest is paid tax free (which include ISAs). If you are not a tax payer you can fill in a form, which will lead to interest not being deducted. If you are a higher rate tax payer you will have to declare interest and pay a further 20% in tax.

Nick_C

Unless you have a low income and qualify to have savings interest paid gross, then your interest is paid net with 20% tax deducted by the bank.

If you are a higher rate tax payer, you need to declare the interest on your tax return, and pay additional tax.

Because the tax rate is 20%, a current account paying 2.4% is rougly equivalent to an ISA paying 3.0%. (Although an ISA at 3% is better than an ordinary savings account at 2.4% because of the compounding over time - the interest on the interest)