Are cash ISAs still worth it?

Using an ISA means you can earn interest on your savings without paying tax. It’s billed as a win-win solution for savers, but that’s not always the case.

Currently, it’s possible to get a cash ISA savings rate that beats the current rate of inflation (2.8% at the time of writing).  This means your savings has more purchasing power.

This is one reason why it could be time to think about moving your money into a savings or investment account with high interest rates.

However, one of the reasons why ISAs have had a rocky road is the Personal Savings Allowance provided to UK residents by the government. This lets basic rate taxpayers earn up to £1,000 in interest a year without paying any income tax.

This means most people can save into a normal savings account without tax consequences, so if you see savings products offering higher interest than ISAs, they are certainly worth considering.

However, there are still some circumstances where a cash ISA remains a good choice.

Why save into a cash ISA?

Money saved into an ISA is income-tax free no matter how much you earn in interest.

The rules for money in other savings vehicles are more complicated. For instance, if the Bank of England raises rates, it could push you over the Savings Allowance, which would mean you have to pay tax.

Equally, if your earnings rise and you’re pushed into a higher tax-bracket, your Savings Allowance will get smaller or even vanish, leaving you with a tax bill. This is particularly relevant as the UK Government has frozen tax bands for the last five years, effectively “dragging” more taxpayers into higher tax bands.

Each year, you get a new ISA allowance. The maximum you can save in ISAs for the current tax year is £20,000. You can’t carry allowances over, so if you think you might move into a higher tax bracket or breach the Savings Allowance, it’s worth considering transferring your savings into ISAs sooner rather than later.

Note that from April 2027, those under the age of 65 will only be able to pay up to £12,000 into a cash ISA (although your overall ISA allowance, including stocks and shares, will remain at £20,000).

You can find out more about paying tax on your savings here.

Are cash ISAs safe?

Cash ISAs are covered by the Financial Services Compensation Scheme (FSCS). This means that you are protected up to £120,000 per person, per regulated firm.

As of April 2024, you can also pay into multiple cash ISAs. It’s always worth shopping around at the beginning of the tax year to find the best rate possible, but if you’ve got significant savings, you should also make sure that you only have £120,000 per firm, to ensure that you are fully protected.

Cash ISAs are savings products, which means your capital is safe, and you get paid interest. You can choose a fixed rate, where the interest rate is guaranteed for a fixed term, or variable rate whether the interest you earn can rise and fall. 

Why choose an ISA?

There are several reasons you might choose a cash ISA.

• If you have a large enough savings pot that you’ll earn more than £1,000 in interest each year, then an ISA is a good idea to protect you from income tax

• Higher rate taxpayers only get a £500 Personal Savings Allowance, making ISAs an appealing option for people with smaller savings pots as the limit will be reached more quickly

• Additional rate taxpayers don’t get any personal savings allowance, making cash ISAs a great choice for short-term, easy-access, and emergency savings

However, most people do not have enough saved up to breach the personal savings allowance. If that’s the case for you, then you want the best returns possible and should shop around for the highest savings interest rate available. You won’t pay income tax on any interest earned anyway, so don’t need the ISA benefits.

There are also some specific types of cash ISA that are designed to help you meet various life goals. These come with other perks, so are worth considering. 

• Lifetime ISAs (LISAs): You can use LISAs to save up to £4,000 annually, with the government adding a 25% bonus (up to £1,000). You can only invest in one LISA per year, but you can open a new one each tax year and you can shift funds to a different provider to take advantage of the best savings rates. You can open one from  18 to 39 and you can only use the money to buy your first home or for your retirement

• Junior ISAs: These are special ISA you can open on behalf of your child. They have their own ISA allowance (£9,000) and the money cannot be withdrawn until your child turns 18 years old. The tax advantages are particularly worth considering for parents saving for their children as this can have income tax implications

What makes ISAs still attractive?

Cash ISAs are safe because any money kept in a cash ISA is protected and if you need it, you can take the money out – immediately if you choose an instant access account. If you put the money into an investment vehicle such as a stocks and shares ISA, on the other hand, there is a risk you will lose it.

Choosing a cash ISA may also benefit your spouse or civil partner if you die, as they can inherit your ISA allowance for that year.

Here is how to choose the right savings account

Are ISAs still the best for rates?

No, cash ISAs do not always pay the best interest rates, so it’s worth shopping around. 

Historically, to beat an ISA you would need to find a net interest rate on a savings account that was higher than an ISA's gross interest rate.

Net interest represents the rate you get on your savings after tax has been deducted. The gross rate is what you get paid before tax.

Now, all banks and building societies use gross interest to advertise their savings accounts. This means you can compare ISAs to other accounts on a like-for-like basis.

In times of low interest and high inflation, ISAs aren’t always the best place for your savings. This is because the amount of interest you can earn, which is often linked to the Bank of England’s base rate, usually doesn’t beat the rate of inflation. 

As prices rise, your savings will be able to buy less and less, eroding their real value over time.

Make sure to keep an eye on savings rates

Once you've signed up to an account, don't assume you'll keep getting that rate forever.

Some accounts include bonus interest for the first year that then drops away, while others only pay the advertised rate for a set period, before dropping off hard.

And that's before we get to variable rate accounts - which rise and fall depending on interest rates elsewhere in the market.

If you're worried that you're getting a poor deal, you can check out the top rates currently on the market by following the link below.

Other types of ISAs?

If you're prepared to put your savings at risk in hope of a greater return, and still want to use your ISA allowance, you could consider one of the following:

Investment ISA

Also known as a stocks and shares ISA, it lets you invest with your ISA allowance but keeps your growth tax free.

Innovative finance ISA (IFISA)

Also known as a P2P ISA, it lets you use your ISA allowance to invest in peer to peer lending.

There is no equivalent to the Personal Savings Allowance with investments or P2P lending, so using an ISA keeps your returns tax-free.

Speak to an independent financial adviser if you are unsure if an investment is right for you.