Which Cash Isas will leave you quids in?

6 March 2018

Interest rates are on the rise, but is a Cash Isa always the best place for your savings? Moneywise weighs up your options.

You can get up to 5% interest for keeping your cash in a current account and most people don’t pay tax on savings, which means some of the appeal of a Cash Isa has waned.

The introduction of the personal savings allowance in April 2016 means that most people can earn interest on savings without paying tax, regardless of whether this is held in an Isa.

A basic-rate taxpayer can earn £1,000 in interest each year before being required to pay any tax while higher-rate taxpayers can earn £500 tax-free from any source each year. However, additional-rate taxpayers do not receive any personal savings allowance.

So why save in a Cash Isa? If you’re a high earner, Cash Isas are still highly useful – but even if you earn below £150,000 a year, there are benefits to using an Isa.

This is because even if your savings pot is small today, it doesn’t necessarily mean it will be in future. Plus if interest rates rise, more modest amounts of savings will start to attract tax in future, based on current allowances. By using an Isa, your savings are protected from tax both now and in the future.

There is further good news for Isa savers, as data from savings comparison website Moneyfacts shows that the average Cash Isa in January 2018 paid 1.09% to savers. That’s more than the average 0.82% in January 2017, although it’s still well below previous years. For example, in January 2012, the average Cash Isa paid a much higher 2.56%.

However, savers should beware as many high-profile Cash Isa accounts today offer interest rates that are lower than the Bank of England’s 0.5% base rate.

This includes the Co-operative Bank Cash Isa, paying 0.46% to savers, as well as the Bank of Scotland Access Cash Isa, Halifax Isa Saver Variable, Lloyds Bank Cash Isa Saver, and Santander e-Isa (Issue 3) – all offering 0.35%.

Even worse is the Virgin Money Easy Access Cash Isa (Issue 20) which pays just 0.25% – half the base rate and way below the best accounts on the market.

Easy-access options

If you will need to dip into your savings and don’t want to tie your cash up for a year or more, look at the top easy-access accounts. These offer immediate access to your money, but pay less interest than fixed-rate accounts.

The Moneywise Best Buy is Virgin Money Easy Access Cash e-Isa (Issue 22), which pays 1.21% to savers.

This account can be opened in online, in branch, by post or by phone. The minimum deposit is £1 and it accepts transfers from other providers.

Remember, while you can access your cash at any time, if you withdraw your money from an Isa you can’t deposit it again without using up more of your annual £20,000 allowance. For example, if you saved £10,000 in an Isa and withdrew £1,000, if you were to deposit this £1,000 again it would eat into your remaining allowance – leaving you only £9,000 for the remainder of the tax year.

Some providers do offer flexible Isas that allow you to withdraw and deposit again without using your allowance, but these tend to offer much lower rates than the market leaders.

If you’re looking to get a slightly better return without locking your cash away for a year or more, consider a notice account. These accounts allow you to withdraw at any time; you just need to give your provider notice that you are doing so.

The Charter Savings Bank 95 Day Notice Cash Isa (Issue 2)  is our top pick. It pays 1.31% to savers who can give 95 days’ notice of any withdrawal. This account must be opened online. The minimum deposit is £1,000 and transfers from other Cash Isa providers are allowed.

Lock your money away

You’ll get higher rates the longer you’re willing to tie up your cash, so this is the best option for savers who know they won’t need access during the fixed period.

The top pick in the one-year Isa market is Charter Savings Bank One Year Fixed Rate Cash Isa. This pays a market-leading 1.46% and must be opened online with a balance of £1,000 or more.

The Charter Savings Bank Two Year Fixed Rate Cash Isa leads the way in the two-year stakes. This account offers a 1.67% interest rate.

Elsewhere, the best three-year fix is the Charter Savings Bank Three Year Fixed Rate Cash Isa, paying 1.8%. This acocunt can be opened online. The Charter Savings Bank Five Year Fixed Rate Cash Isa at 2.25% is the top pick in the five-year market. 

All these accounts allow transfers, which means you can move your Isas from previous years across to earn more in interest.

However, while each of the Cash Isa accounts listed in this guide are fully protected by the Financial Services Compensation Scheme, only the first £85,000 of deposits is protected per banking licence. So if your savings pot is bigger than this, be sure to split your cash across several financial institutions.

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