An ISA – which stands for individual savings account – allows you to save and invest money tax-free. There are various different types of ISA available, but cash ISAs are by far the most popular. These effectively function like a savings account that you would have with a bank or building society, with the added guarantee that all the interest you earn is tax-free. In this article, we’ll explain the differences between the various types of ISA available and provide all the information you need to choose the best cash ISA for maximising your savings.
Before diving in, it’s worth noting that there are several government allowances that mean many savers don’t pay tax on their interest anyway. For example, the Personal Savings Allowance allows basic-rate taxpayers to earn £1,000 in interest a year without paying tax on it, while higher-rate taxpayers can earn £500 interest tax-free (additional-rate taxpayers don’t benefit from the allowance).
Some people can earn even more tax-free. You can receive up to £5,000 of interest tax-free if your other income, such as from your job, is less than £17,570. This is known as the starting rate for savings. You may prefer to use an ordinary savings account rather than a cash ISA if there’s no tax benefit, especially if the interest rate you can get on a savings account is higher.
However, cash ISAs can still be useful, particularly if you can’t take advantage of any savings allowances. Anyone aged 16 or over can open a cash ISA, regardless of how much they earn. There are a few rules to watch out for – for example, you can only pay in up to £20,000 across all your ISAs in the 2021-22 tax year.
The tax-free guarantee with an ISA is also handy in case your savings grow in future and the interest exceeds the Personal Savings Allowance, if the government suddenly withdraws the allowance, or if you get a pay rise that pushes you into a higher income tax bracket, reducing the amount of interest you can earn tax-free.
If you think that an ordinary savings account is a better choice for you, then visit our best savings accounts article to see some of the top accounts and find out how to choose one.
READ NEXT: The best savings accounts in 2022
What types of ISA are there?
There are four types of ISA for adults in which you can currently invest your money. Cash ISAs are the direct equivalent of ordinary savings accounts that, like savings accounts, can be easy-access, fixed-rate, notice or regular savings accounts. You can read more about these on our best savings accounts page.
The other three types are:
- Stocks and shares ISAs: These let you invest your money in the stock market, so you could lose money as well as earn it. They have the potential to grow your money more than a cash ISA, but you should invest for at least five years to make up for any rises and falls in the value of your investments.
- Innovative finance ISAs: The ISA provider lends your money to individuals or businesses and you earn interest on the loans. There’s a risk that you could lose money if the borrowers don’t pay back the loans.
- Lifetime ISAs: These are designed to help you save to buy your first home or for retirement and can hold cash or stocks and shares. You can only open one if you’re between 18 and 40 years old. They let you pay in up to £4,000 a year until you’re 50 and give you a bonus of 25% from the government of up to £1,000 each year. You can only take out the money if you’re buying your first home, aged 60 or over or terminally ill.
You can only put money into one of each type of ISA each tax year but you can pay the whole £20,000 into one type or spread it across two or more types. Only £4,000 of it can be paid into a Lifetime ISA, though.
There are also Junior ISAs for saving for children, but there’s a separate allowance for this. You can pay up to £9,000 into a Junior ISA in the current tax year on top of your £20,000 allowance.
Help to Buy ISAs were previously available to help you save a deposit to buy a home, but you can no longer open a new one.
You can transfer money in your ISAs to a new provider to get a better interest rate or switch to a different type. You should contact the new provider to do this for you, as if you take the money out yourself it will lose its tax-free status and will be treated as a new deposit if you want to reinvest it in an ISA.
If you’re transferring the money you’ve paid in during the current tax year you have to transfer all of it, but you can transfer part of the money you’ve invested in previous years if you wish.
How to find the best cash ISA for you
You should always compare current rates using comparison sites before you take out a cash ISA. First, though, ask yourself the following questions so you know what to look for.
Do you need instant access to your money?
Taking out a fixed-rate ISA will give you a higher interest rate, and you can usually make withdrawals before the end of the term subject to an interest penalty, but if you want to be able to access your money at any time you’ll need to take out an easy-access ISA. Interest rates on accounts that aren’t fixed are generally variable so can go up or down.
Bear in mind that if you take money out you’ll lose that part of your ISA allowance for the year unless you take out a flexible ISA. Flexible ISAs are available from some providers and let you pay money you’ve withdrawn back in without having to use up more of your allowance.
Watch out for accounts with a bonus interest rate for a period of time, which is usually a year, as the interest rate will drop at the end of this period.
All accounts have minimum and usually maximum amounts you can hold in them, so make sure you have at least the minimum amount if you want to invest in a particular account.
Do you have a preference for how often interest is paid?
Most cash ISAs pay interest yearly, but if you’d prefer to get it monthly, consider choosing an account that pays you interest every month. These might not be the highest-paying accounts, though.
How do you want to be able to access your account?
Many of the best cash ISAs are online only. If you want to be able to use a branch, telephone banking or post to operate your account, look for one that offers this.
Do you have savings of more than £85,000?
Your money is protected up to £85,000 with each banking institution through the Financial Services Compensation Scheme should the bank go bust. If you have more than this or the interest you’ll accrue will take you over this amount, try to spread your money across more than one provider for peace of mind.
Some banks share the same banking licence, such as Halifax and Bank of Scotland, so you only get £85,000 of protection between them.
Below you can view the top easy-access accounts currently available in two categories. As the best accounts change frequently, check rates on comparison sites before you take one out.
Top five easy-access cash ISAs
|Interest rate (AER)||Minimum deposit||Notes|
|Saga||1.00%¹||£0||Managed online or by phone, interest paid monthly, transfers in allowed|
|Marcus by Goldman Sachs||1.00%¹||£0||Managed online or by phone, interest paid monthly, transfers in allowed|
|Shawbrook Bank, Easy Access Cash ISA Issue 20||0.92%||£1,000||Managed online or by phone, interest paid on anniversary, transfers in allowed|
|Nationwide Building Society, 1 Year Triple Access Online ISA 12||0.8%||£1||Managed online or by via app, interest paid on anniversary, transfers in allowed|
|Ecology Building Society, Ecology Cash ISA||0.8%||£25||Managed online or by post, interest paid yearly, transfers in allowed|
Notes: 1 Rate includes 0.10% bonus for 12 months. Correct as of 13 April 2022.
Top five one-year fixed-rate cash ISAs
|Interest rate (AER)||Minimum deposit||Notes|
|Secure Trust Bank, 1 Year Fixed Rate Cash ISA||1.4%||£1,000||Managed online or by phone, interest paid yearly, transfers in allowed|
|Shawbrook Bank, 1 Year Fixed Rate Cash ISA Bond Issue 59||1.4%||£1,000||Managed online or by phone, interest paid on anniversary, transfers in allowed|
|Gatehouse Bank, 1 Year Fixed Term Woodland Cash ISA||1.4%||£1,000||Managed online or by phone, interest paid yearly, transfers in allowed|
|Tipton & Coseley BS, Fixed Rate ISA to 31.05.23||1.35%||£1,000||Managed in branch, by post or via app, interest paid yearly, cash ISA transfers in allowed|
|Kent Reliance, Cash ISA 1 Year Fixed Rate Issue 53||1.34%||£1,000||Managed online, in branch or by post, interest paid on maturity, transfers in allowed|