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Variable vs fixed-rate ISA: which option best suits your needs?

Choosing the correct type of ISA for you can become confusing, especially when you realise that Cash ISAs come in either fixed or variable-rate form. Each brings its own advantages and disadvantages depending on your needs.

If you want to learn the differences between a variable vs fixed-rate ISA and which is best for you, this article will tell you everything you need to know.

Key takeaways

  • The main difference between variable and fixed-rate ISAs is that the interest rates on variable-rate ISAs can change, depending on the base rate and several other factors. This differs from fixed-rate ISAs, which give you a pre-arranged rate of interest that stays the same for a fixed term.
  • The ISA allowance every tax year (£20,000 in 2021/2022) still applies to both types of ISA, and your savings are protected from Income Tax and Capital Gains Tax (CGT).
  • Depending on the provider, both types of ISA can be regulated by the Financial Conduct Authority (FCA), and your money can be protected by the Financial Services Compensation Scheme (FSCS).
  • Lifetime ISAs, Stocks and Shares ISAs, and Innovative Finance ISAs do not have the option of variable or fixed-rate – only a Cash ISA does.
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What exactly is a variable-rate ISA?

Variable-rate Cash ISAs, or “variable ISAs”, are tax-efficient savings accounts that provide you with a variable interest rate. The AER (Annual Equivalent Rate) that you will receive is determined by your ISA provider.

Each bank or building society will offer different rates on their variable ISAs, and these rates typically change when the Bank of England changes the base rate (although they can change for other reasons).

How does a variable ISA work?

With a variable ISA, your interest rate can change at any time. This may happen because the base rate has changed, or your provider may decide to alter the terms of your account. Your provider will likely inform you when these changes have been made.

You can typically pay in money or withdraw your savings whenever you please, though the withdrawal conditions usually depend on the provider.

You don’t have to worry about paying Income or Capital Gains Tax either, as any savings accrued over time are free of these taxes. This means you could avoid tax on any interest above your Personal Savings Allowance. However, your ISA may be subject to Inheritance Tax if it is passed on to your beneficiary in the unfortunate event of your death.

The yearly ISA allowance limit, which is a cap on the amount of money you can pay into the ISAs you own in a single tax year, applies to variable-rate ISAs. In the 2021/22 and 2022/23 tax years, the ISA allowance is £20,000.

What different types of variable-rate ISA are there?

Notice ISAs

A variable-rate ISA with notice means that you will need to forewarn your bank if you want to withdraw money.

This notice period can be from a few days up to a few months, depending on your provider. Generally, most providers have a notice period of between 30 to 180 days for notice ISAs. This means that you will need to plan ahead to manage your withdrawals.

If you need to access your savings within the notice period, you’ll typically pay an interest penalty.

Variable-rate ISAs with notice typically pay better rates than easy-access accounts. However, the trade-off is that you normally have to wait a few weeks or months for your withdrawal to arrive.

Easy-access ISAs

Unlike ISAs with a notice period, easy-access ISAs allow you to make withdrawals whenever you need to.

This means you have more control and flexibility over your money, although you can expect that the rates you receive will be lower than a notice ISA.

It is worth noting that an increasing amount of providers are limiting the number of withdrawals you can make in the same tax year. Make sure you understand the terms of your ISA before you deposit your money.

What are the benefits of a variable-rate ISA?

The rate you receive could rise

Your interest rate could rise if the Bank of England increases the base rate or if your provider decides to increase the interest rate on your account. This could increase the amount you receive in interest.

Also consider: Will ISA rates go up?

No set window for deposits

With a variable-rate ISA, you can pay in as much as you want, whenever you want, so long as you are still within your yearly ISA limit.

This means you can make payments as you wish rather than having to deposit a large lump sum all at once.

Wide range of options

There are many providers out there, so you’ll have a huge choice of different accounts.

You can search through all available ISAs, compare different rates and potential returns, and withdrawal options and decide which is best for you.

What are the disadvantages of a variable ISA?

Lower interest rates

As of February 2022, the Bank of England’s base rate is 0.5%. That means variable-rate ISAs will likely currently give you a lower interest rate compared to other types of ISA.

Interest rates can decrease

As you don’t have a fixed interest rate, it could decrease at any point if your provider decides to do this. For example, if the Bank of England chooses to lower the base rate, your provider may then reduce the rate of interest you receive on your variable ISA.

May not be able to plan ahead

Since rates can change, it makes it difficult to plan ahead as you don’t know how much you will earn. You’ll need to take potential rises or falls into account when managing your finances.

What exactly is a fixed-rate ISA?

A fixed-rate ISA is a type of savings account that pays a guaranteed rate of interest for a set amount of time, much like fixed-rate bonds.

The AER rates for fixed-rate ISAs are locked and will remain the same for a specified period of time – perhaps one, three, or five years. The interest rate you receive will tend to be higher, however, than that offered by a variable-rate ISA.

How does a fixed-rate ISA work?

With a fixed-rate ISA, you will know exactly how much interest you will earn over the term. Even if the Bank of England’s base rate increases, your AER rate will remain the same.

Your money is locked away with a fixed-rate ISA. When you open your account, you agree to commit your money for a fixed period – perhaps one, three, 0r five years.

Usually, the interest rates are higher the longer you commit your savings. It’s important to note that, once your money is in the account, it can’t normally be accessed before maturity without potentially incurring high penalties.

Once you have opened your fixed-rate ISA, you normally have a set window to deposit money – usually around a couple of weeks. After the window closes, your money is locked away and you usually can’t make deposits.

When you have made your eligible deposits, you will start to earn tax-efficient interest on your savings.

Fixed-rate savings accounts are usually open for between one and five years. After your account has matured, you’re free to access your money and any interest you have accrued.

The full ISA allowance every tax year still applies to fixed-rate Cash ISAs.

What types of fixed-rate ISA are there?


Long-term fixed-rate ISAs are savings accounts where you can put away your money for much longer than other types of ISA.

You are typically presented with much higher rates when choosing an account that takes longer to mature. However, once the money is deposited, it can’t normally be accessed until the end of the term without incurring a charge.

You need to ensure that you can commit to a long-term ISA, as while you will typically receive a higher interest rate, it can be a long time for your money to be locked away.

You could find yourself on an uncompetitive rate if the Bank of England’s base rate increases while you’re on the rate you committed to.

Also consider: Will interest and savings rates rise in 2022?


Short-term fixed-rate ISAs do what the name suggests – you commit your money but for a shorter period.

You can expect to receive lower rates, but this is countered by the fact that you don’t have to put your money aside for as long.

This gives you the flexibility to review your options once your fixed-term ends.

What are the benefits of a fixed-rate ISA?

A consistent rate of interest

Since your interest rate remains the same with a fixed-rate ISA, you can expect to receive a consistent amount of interest over time.

This is because your rate will stay the same throughout your fixed-rate period regardless of whether the Bank of England’s base rate moves.

You can plan ahead

Since your rates are guaranteed to remain the same, you know exactly how much you are going to earn in interest.

This means you know precisely how much money you will have earned by the end of your maturity period, allowing you to easily plan and manage your finances.

Great for meeting saving targets

Like fixed-rate bonds, your money is locked away for a set amount of time with a fixed-rate ISA. This can be the perfect tool for saving for a milestone purchase.

Saving for a house, for example, can be much easier as it is difficult to access the money once your account is open. This means there’s no temptation to withdraw and spend it.

You can even plan ahead and ensure your ISA matures around the time you were planning to make the purchase.

What are the disadvantages of a fixed-rate ISA?

You can’t add more money after the deposit window closes

Much like fixed-rate bonds, once the initial deposit period has passed, you will be unable to add more money to your account. So, it might mean this type of account is not appropriate if you wanted to add to your savings in the future.

You can’t access your money before maturity

As soon as you deposit your money and the limited time window closes, you are unable to access your money without facing high penalties until the account matures.

While this is great for meeting targets and watching your savings grow, it can also mean it’s difficult to access your funds, especially in an emergency.

The base rate could rise

Unfortunately, there is no way to be certain that the Bank of England won’t increase the base rate while your money is locked away.

If prevailing interest rates were to rise significantly, you could be committed to an uncompetitive rate of interest until your fixed-rate ISA matures.

What are the main differences between variable ISAs and fixed-rate ISAs?

Variable and fixed-rate ISAs have many differences and it is important to understand them before deciding which to choose:

  Variable-rate ISAs Fixed-rate ISAs
Interest Rate Typically lower rates that may change over time. Usually higher rates, but they are locked in place.
Withdrawals You can withdraw your money whenever you like with an easy-access ISA, or after a notice period with a notice ISA. You need to wait until your account matures before you can withdraw money, otherwise, you may be subject to high charges.
Deposits You can make deposits at any time, either as a lump sum or as repeated smaller payments. You can make one large lump sum payment within a limited window of opening an account, then you are unable to deposit more afterwards.
Hold Time You are able to hold your savings for as long as you wish. It depends on whether you have a long term or short term ISA. The period usually ranges from one to five years.

Should I go for a fixed or variable ISA?

The type of ISA you decide to go with all depends on your reasons for wanting to save in the first place.

If you want to retain access to and have freedom over your savings, then a variable-rate ISA would generally be best for you.

If you’re prepared to commit your money for a fixed period, in return for a higher interest rate, a fixed ISA may be more appropriate.

If you plan on saving on a longer-term basis for a milestone purchase, such as the deposit for a house, a fixed-rate ISA could be better for your needs as it is an excellent tool for saving a large amount of money over a fixed term.

Frequently asked questions

Is my money protected in both variable and fixed-rate ISAs?

Yes. If your provider is covered by the FSCS, your money is protected. The FSCS protects any money held with banks and any other financial institution, including ISAs, up to the value of £85,000.

To ensure everything runs smoothly, efficiently, and above board, ISA providers are regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority.

Is a variable rate better than a fixed rate?

This all depends on your reasons for saving and what you are comfortable with. If you are happy with rates potentially changing in the future and want flexible access over your savings, then variable rates are better for you.
If you are happy to commit your money for a set period of time as a trade-off for a higher rate of interest, then a fixed rate would be better suited for you.

Is a fixed-rate bond better than an ISA?

Fixed-rate bonds are similar to fixed-rate ISAs in that they provide guaranteed rates of interest by locking your money away until maturity.

There is no limit to the amount of money you can deposit with fixed-rate bonds, but you may be taxed on any interest that exceeds your Personal Savings Allowance. This is unlike a fixed-rate ISA, which protects your interest from Income Tax and Capital Gains Tax.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

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