If you are resident in the UK and over the age of 16 then you are eligible to open a cash ISA.
But what is is a Cash ISA?
In the UK, residents are charged tax on all income, and this includes interest earned on their savings. There are however exceptions to this, and everyone can avoid this tax as long as they are earning under a certain threshold, or, they have their savings in an ISA account. ISA stands for Individual Savings Account and within Cash ISAs, you can earn interest on your savings without having to pay any tax on that interest.
At the start of each tax year, everyone is entitled to a Cash ISA allowance. This is a sum of money, as stipulated by the government, that you are entitled to pay into an ISA in that financial year. For the year 2020/21 this amount is £20,000 and this is set to continue for the next financial year of 2021/22.
Should you fail to use your allowance in any one year, this amount is lost to you, there is no option to carry it forward into the next year. Anything over and above this amount will not be tax free.
Top 5 ISA Providers
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Different Types of Cash ISA
There are a variety of Cash ISAs on offer to suit your individual needs including:
Easy Access ISA – With Easy Access Cash ISAs you can withdraw your money whenever you want without incurring any kind of charge or penalty. They offer full flexibility which is great if you need regular access to your tax free savings, however, the flip side is that you will often get a lower interest rate with Easy Access ISAs. This is often referred to as an Instant Access ISA.
Regular Saver ISA – A Regular Saver ISA will usually reward savers with a higher interest rate in exchange for a commitment to deposit a fixed sum of money into your ISA account each month. Regular saver ISAs will usually restrict access to your account for 12 months.
Junior ISA – A Junior ISA allows you to save for your child with a maximum deposit of £9,000 in any one tax year. Every child under the age of 18 is entitled to one Junior ISA account as long as they are resident in the UK.
Notice ISA – A Notice ISA can have an attractive tax free interest rate however, they require advance notice should you wish to withdraw your money.
Fixed Term ISA – A Fixed Term ISA can offer some of the best interest rates available, however, you will not be able to access your money for the duration of the term. You can choose to keep your money in a one year fixed rate ISA, however, the interest rate for a two year fixed rate ISA is often more lucrative and if you are able to commit to a five year fixed rate ISA then you can enjoy an even higher interest rate.
Lifetime ISA – Lifetime ISAs are products designed to help savers put money aside for their first home. You have the option of depositing up to £4,000 per tax year and the Government will add an additional 25% of what you deposit up to the value of £1,000 per year. There is limited access to this account and you will only have the option to withdraw on the purchase of your first home, or when you turn 60 years old. Outside of these reasons any withdrawals will incur a 25% charge.
Help to Buy ISA – Help to Buy ISAs are now only available to existing account holders. Like the Lifetime ISAs they receive a 25% bonus from the government and are designed to help savers buy their first property.
Top Cash ISA Rates for 2021
You can only open one cash ISA per financial year, therefore, it’s important to ensure you find the best product for your needs the first time round.
When deciding on the best ISA for you, the first step is to establish which type of Cash ISA is best suited to your saving goals. If you are saving for the long term (five years or more) and don’t need access to your money, then you may want to consider Stocks and Shares ISAs. With plenty of time to ride out any volatility in the marketplace, investing your money will usually give you better returns than Cash ISAs. However, if you are saving towards a short term goal, then you might be better to place your money in a Cash ISA.
Once you have an idea which type of ISA is likely to be the best type for you, then the next step is to determine which provider is currently offering the best rates. Below we have detailed which provider is offering the highest rates for each type of Cash ISA available.
The best ISA rate that you can secure usually depends on the type of ISA you require. Below we have listed some of the best rates available today for the various types available.
Please note: Rates are correct at time of publishing – 13/01/2021 and maybe subject to change. Please check the individual providers for the latest rates on cash ISAs.
- Easy Access and Instant Access ISA – The best rate currently available for an Easy Access ISA is 0.6% AER which is currently being offered by Al Rayan Bank.
- Regular Saver ISA – The best rate currently available for a Regular Saver ISA is 1.45% which is currently being offered by Vernon Building Society.
- Junior ISA – The best rate currently available for a Junior ISA is 2.95% which is being offered by Coventry Building Society.
- Notice ISA – The best rate currently available for a Notice ISA is 1% AER which is being offered by Cumberland Building Society.
- Fixed Term ISA – The best rate currently available for a Fixed Term ISA is 1.25% for a seven year term currently being offered by Shawbrook Bank.
- Lifetime ISA – The best rate currently available for a Lifetime ISA is 1.1% currently being offered by Moneybox.
Compare Cash ISAs
Comparing Cash ISAs can feel like a massive task, however, we’ve done a lot of the leg work for you. When measuring up one provider against another there are obvious things to ask yourself such as:
- Does the provider have a high street presence?
- Is the provider offering a cash incentive for opening an account?
- Is it important to you that you are already familiar with the provider?
- Does the provider supply a mobile app for managing your account?
- Does the provider have other savings vehicles that may be of interest to you?
It is also worth checking TrustPilot for independent reviews from existing customers which can provide valuable insights into factors such as customer service.
How to Find the Best Cash ISA
Whilst we have listed the best interest rate above, and certainly this is one of the main considerations when selecting the best Cash ISA for you, there are other factors that you should take into account.
Firstly it’s important to know what is required when opening an account. If you need to turn up at the branch as part of the onboarding process and the bank is the other side of the UK from where you live, then it probably won’t be worth your time.
Many Cash ISAs can be opened quickly online and it’s worth checking the account opening process for the provider you are considering.
The other factor to consider is the minimum deposit amount. This can range anywhere from between £1 to £1,000 depending on the ISA you select. If you are transferring a Cash ISA from another provider then it would be prudent to ascertain the transfer policy for the provider you are considering, as well as any transfer fees that your current provider may charge you.
Lastly, should you be considering a fixed term ISA then there will be associated fees for any withdrawals made before the term of the ISA is completed. These range from provider to provider but can be fairly costly so it is worthwhile checking for these before making any commitment.
5 Cash ISA Need-to-Knows
Many people make the mistake of thinking that a Cash ISA is the best solution for everyone who wants to save money. However, before you put your money in a Cash ISA you should consider the following:
- In the basic tax band, only savings that generate interest of over £1,000 per annum will be taxed, anything under that comes as part of your Personal Savings Allowance and is tax free. If you fall under this amount then you may want to consider a Stocks and Shares ISA or a regular savings account which will often offer better returns than you will find at any Cash ISA.
- If you already have a Cash ISA then it is worthwhile checking that you are still taking advantage of the best interest rate available as you can shop around and transfer your ISA for greater gains if not.The important thing to remember here is that you should NEVER withdraw your ISA in order to change provider. This is because once your money is withdrawn it will lose all its tax benefits and depositing into another provider will count towards your annual ISA allowance. Check that any transfer fees won’t counteract any benefits to be had from the increase in interest rates at another provider.
- If you are not sure whether you will need to withdraw your money then it is worth finding an ISA provider that is flexible. This means that you can withdraw your money without incurring a charge, and replace it, without it affecting your annual ISA allowance.
- If you are saving for your first home, or saving for your retirement then it is a good idea to consider a Lifetime ISA so you can take advantage of the 25% bonus offered by the government. Lifetime ISAs are only available to savers between the ages of 18 and 39 and you can only save a maximum of £4,000 per tax year into your ISA. Ensure you are familiar with all the penalties associated with a Lifetime ISA first.
- The annual ISA allowance for 2020/21 is £20,000. It is important to use as much of your allowance as you can in order to protect your money from tax. Remember, any unused allowance is lost to you and can never be recovered.
Best Easy-Access Cash ISAs
An Easy Access Cash ISA is the perfect saving vehicle if you are unsure as to whether you may need to dip in and out of your savings and can provide you with the flexibility you need without incurring any penalties that will ultimately eat into your gains.
You should take the time to check whether your bank or building society have an ISA on offer and what rate they are currently offering.
Please note: Rates correct at 13/01/2020. Please check latest rates with individual providers.
|Provider||AER||Min. Opening Balance||Transfer In?|
|Al Rayan Bank||0.60%||£50||Yes|
|Furness Building Society||0.50%||£1||Yes|
|Punjab National Bank||0.50%||£1||Yes|
|Skipton Building Society||0.30%||£1||Yes|
|Newcastle Building Society||0.25%||£1||Yes|
|Principality Building Society||0.25%||£500||Yes|
|Monmouthshire Building Society||0.10%||£1||Yes|
|Leeds Building Society||0.15%||£1||Yes|
|Saffron Building Society||0.15%||£1||Yes|
|Buckinghamshire Building Society||0.15%||£1||No|
|Darlington Building Society||0.35%||£1||Yes|
|Ipswich Building Society||0.10%||£10||Yes|
|State Bank of India||0.25%||£1||Yes|
|Chelsea Building Society||0.10%||£1||Yes|
|Bank of Scotland||0.05%||£1||Yes|
|Yorkshire Building Society||0.10%||£10||Yes|
Best One-Year and Two-Year Fixed Rate Cash ISAs
When considering whether to put your money into a Fixed Rate Cash ISA you should firstly be aware that should the interest rate increase, you won’t benefit until the end of the term of the ISA. Therefore, if the interest rate is at an all time low (such as they currently are) then you won’t be able to take advantage of any increase that may occur. Also, a one or two year fixed rate Cash ISA will also carry penalties should you need to withdraw your money before the end of the term. Therefore you will need to be sure you are comfortable with your money being tied up.
Best One Year Fixed Rate Cash ISA
|Provider||AER||Min. Opening Balance||Transfer In?|
|Al Rayan Bank||0.65% Expected Profit Rate||£1,000||Yes|
|Saffron Building Society||0.6%||£500||No|
|Skipton Building Society||0.40%||£1||Yes|
|Punjab National Bank||0.7%||£1||Yes|
Best Two Year Fixed Rate Cash ISA
|Provider||AER||Min. Opening Balance||Transfer In?|
|Al Rayan Bank||0.75% Expected Profit Rate||£1,000||Yes|
|Secure Trust Bank||0.75%||£1,000||Yes|
|Bank of Scotland||0.20%||£500||Yes|
With the interest rate being at an all time low, perhaps now is the time to consider if a Stocks and Shares ISA would be better suited to your circumstance. Certainly if you have enough savings in place that you can access quickly, investing your money will reap better rewards over time.
Best Cash ISA FAQs
What is the personal savings allowance?
The personal savings allowance is an amount of income generated from savings interest that each UK resident is entitled to receive, each tax year, without it being subject to any tax. For a basic-rate taxpayer this means you can earn up to £1,000 interest per year without paying tax on it. Higher-rate taxpayers are entitled to £500 of interest income tax free.
Can I carry over my unused allowance from a previous year?
In short, no. Any unused allowance is lost once that financial year has passed.
Is my money safe in a Cash ISA?
A Cash ISA works very much like a normal savings account but with the added bonus of not paying tax on any income generated. This means you are guaranteed to get back what you put in, plus any interest earned. Most providers are also authorised and regulated by the Financial Conduct Authority and covered by the Financial Services Compensation Scheme (FSCS) which protects your money from the provider going bust, up to the value of £85,000. In order to offer an ISA within the UK, the provider must also be registered in England.
What’s the difference between a Cash ISA and a Stocks and Shares ISA?
A Cash ISA lets you save money and earn interest without having to pay tax on any of your interest earnt. A Stocks and Shares ISA is a tax free vehicle from where you are able to invest your savings. With a Cash ISA you are guaranteed to get your deposit back plus any interest you have earnt, however, with a Stocks and Shares ISA there are no guarantees and you risk losing all your money. Despite the associated risk, investing your money has historically provided better returns than a Cash ISA.
Can I withdraw my money from my ISA account?
This very much depends on the type of Cash ISA you have. An Easy Access Cash ISA will allow you to dip in and out of your savings whenever you like, however, these Cash ISAs often offer the lowest interest rate. Flexible ISAs will also allow you to take money in and you can deposit the money back into your ISA accounts without affecting your ISA allowance for that tax year.
Can I have more than one ISA?
The short answer to this is yes, however, there are certain limitations that you will need to adhere to. You can only have one current year’s cash ISA open at any one time, so while you are fine to hang on to your old Cash ISAs from previous years, you can open a new ISA each year. You are also permitted to have different types of ISA open in any given year. The main stipulation is that regardless of how many Cash ISAs you have, you still need to stay within the ISA allowance across all your ISA accounts when depositing.
Is it really worth saving into an ISA with the rates being so low?
The first thing to ascertain is whether you are earning above the personal allowance from interest on your cash. If the answer is yes, then it is certainly worth protecting your returns from the taxman. However, with interest rates being so low, you may want to consider the merit behind saving your cash in a high interest account, and then transferring the full amount into your Cash ISA just before the end of the tax year. This way you can take advantage of the additional earnings from the higher rate, and still protect your interest from the taxman.
What’s the difference between a bank and a building society?
The main difference between a bank and a building society is that a bank is operating on behalf of its investors whereas a building society is a mutual institution, meaning that a building society is owned by, and working for, their customers. The result of this is that the interest rate offered by a building society tends to be higher than that offered by a bank as they are not required to pay dividends to any of their shareholders. A building society tends to offer all the same products as a bank, however, they often operate on a regional basis so it is worth checking if you are actually eligible to open an account.
Do I pay tax at the usual rate if I withdraw my money from my ISA?
Yes. The moment you withdraw your money from your ISA it loses its tax free status and anything over the personal savings allowance will be subject to tax.
Is there any protection for funds over and above the amount covered by the Financial Services Compensation Scheme?
Not within the one provider, however, if you are over this amount, then you could opt to spread your ISAs over different providers in order to ensure you are covered by the Financial Services Compensation Scheme in each ISA.
Can I swap my instant access ISA for an Investment ISA?
Yes, during times of low interest rates, it is often more lucrative to invest part or all of your savings. Therefore you are at liberty to transfer part or all of the cash in your Instant Access ISA to an investment ISA.
Are interest rates better in regular savings accounts?
Yes, it is often the case that savings accounts offer a better interest rate than a Cash ISA, however, you should remember that any interest you earn in savings accounts will be subject to tax. To put this into perspective, top-rate taxpayers will pay £45 in tax for every £100 interest they earn in a normal savings account. Conversely, in an ISA you will get the full £100, and therefore a normal savings rate would have to be 82% higher in order to yield better returns than Cash ISAs even with today’s low ISA rates.
Can I transfer several old ISAs into one ISA with a better interest rate?
Yes! And you should. Consolidating all your ISAs into one with a better interest rate is a great way to increase your earnings. Often providers will cut interest rates on money you have saved previously so it’s best to check that you are still getting the best interest rate on offer.
What is an Innovative Finance ISA?
An innovation finance ISA is a platform from which you can make peer-to-peer lending investments tax free.