What are Cash ISAs?
Cash ISAs are Individual Savings Accounts structured as a ‘tax wrapper’ which means it lets you save without having to pay any tax on the interest you earn.
You save up to £20,000 each tax year (this is your ISA allowance) without paying tax on any of the interest you earn on your savings, and you don’t have to declare it on your tax return. They are useful for high earners with a lot of savings who might not be covered by the personal savings allowance, which lets you earn £1,000 of savings interest tax-free as a basic-rate tax payer, or £500 if you’re in the higher-rate band.
Cash ISAs can be either variable rate or fixed rate accounts. Variable means the rate can change depending on what the Bank of England base rate is, while a fixed rate account offers you an unchanged rate for a certain time period, but you will usually have to lock your money away for between one and five years.
A no-notice variable rate Cash ISA lets you access your money at any time, or you could go for one with a notice period or a fixed term for a better rate, but the interest rate you can earn is subject to change.
- Related guide: What are the best bank switching offers at the moment?
How do Cash ISAs work?
You can only open one Cash ISA in any tax year, but you can hold more than one. You can switch any money you hold in an ISA so, for example, if you had a fixed-rate Cash ISA and the term came to an end you dropped to a worse interest rate, you could do an ISA transfer to move your money to a higher-interest paying account. Note that you must not withdraw the money in cash and pay it in to a new account, you have to do an actual ISA transfer as otherwise you would lose the tax benefits.
Advantages of Cash ISAs
- The main advantage of a variable rate Cash ISA is that you do not pay tax on the income you receive.
- They can be flexible and easy access, so you can get your savings when you need them, although some accounts can have a fixed term and still pay a variable rate.
- Your savings are protected up to £85,000 in the event your FCA-regulated provider collapses.
- If you save for longer, you get better rates. The longer the term of the ISA, the better rate you could get. If you do need to withdraw your money early you may have to pay a penalty or the account may be closed
Disadvantages of Cash ISAs
- The returns may not be as good as a stocks and shares ISA, although this largest depends on the performance of the stock market.
- They do not offer the best interest rates – as the product is tax efficient they are more expensive for providers to operate. So you may find you get a better interest rate with a regular savings account of fixed-rate bond.
- If you have a variable cash ISA, there is uncertainty over the rate you will get, as a variable rate product can change what it pays in line with the Bank of England’s base rate of interest.
- You may not be able to access your cash for a fixed term, and this can work against you if rates go up and you’re locked in to a lower-paying deal. Depending on whether you think interest rates will go up or down from here, you could choose a longer or shorter fixed term for your ISA.
Best fixed-rate Cash ISA rates:
With fixed-rate Cash ISAs the interest rate is fixed for a certain time and you are guaranteed to receive regular income.
- Shawbrook Bank1 Year Fixed Rate Cash ISA Bond Issue 80 AER 5.78%
- Charter Savings Bank2 Year Fixed Rate Cash ISA AER 5.78%
- UBL UK1 Year Fixed Rate Cash ISA AER 5.77%
- Aldermore1 Year Fixed Rate Cash ISA AER 5.71%
- Kent RelianceCash ISA 2 Year Fixed Rate – Issue 79 AER 5.71%
Best variable-rate Cash ISA rates:
With variable Cash ISAs the interest rate may change based on the underlying rate set by the Bank of England so it’s important to understand that the interest rate you receive can change.
- Loughborough BS180 Day Notice Cash ISA AER 5.00%
- Progressive BS1 Year Variable Rate ISA Bond (Issue 1) AER 5.00%
- Teachers BSCash ISA Notice 180 (Issue 1) AER 5.00%
- Loughborough BS120 Day Notice Cash ISA AER 4.75%
- Newcastle BSNewcastle Double Access ISA (Issue 1) AER 4.50%
Cash ISA alternatives
If you have already used up your ISA allowance or want to see if there are better saving account interest rates Hargreaves Lansdown offers an Active Savings product, where you can save across a range of different savings accounts without having to open up a new account each time.
We have also listed below some of the latest saving account switching offer and providers with some of the best interest rates for your savings.
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You may also be interested in these other types of savings accounts: