If you have savings, and aren't using an ISA, then you're over-engorging the taxman's pocket. A Cash ISA is simply a tax-free savings account; get the top payer and it's a big interest boost. You can deposit up to £3,600 between now and April 2009, so go now and earn as much interest as possible. The ISA savings calculator will tell you exactly what this means for your money.
 What is an ISA? How Cash ISAs work BEST BUY: The top ISAs The ISA Savings Calculator Boost existing returns The Size of the Savings |
The ISA clock is counting down the time left in this ISA year. |
For six years now whether on telly, radio or in m'book I've used the same analogy to explain ISAs. So why stop now? Here come the cakes!
How do Cash ISAs work?
While the annual ISA allowance is £7,200, only £3,600 may be put in cash. The best route for this is what's called a Cash ISA; these work just like normal savings, except the interest isn't taxed.
Usually, a basic rate taxpayer pays a fifth of their savings interest in tax, a higher rate tax payer two-fifths. Turning this around, it means basic rate taxpayers earn 25% more interest at the same rate in a cash ISA, and higher rate taxpayers 66% more!
There are a few oft confused ISA facts:- Money may be withdrawn at any time without losing tax benefits.
Yet once the money's withdrawn, it can't be returned. An example should help: Put £2,400 in and there's £1,200 of this year's allowance left. Withdraw £1,000 from it, and you may still only contribute £1,200 more. The fact you've withdrawn the money doesn't change anything.
- You get a new ISA allowance each tax year.
Each tax year (6 April until the next April 5) everyone aged 16 or over gets a new ISA allowance. If you don't use it, you lose it. Yet if you do put the cash in, you can keep it in there, tax-free for as long as you like. And as soon as the next tax year starts (i.e., 6 April) you can put a whole new £3,600 in too.
- Only one Cash ISA per year.
You can only have a Cash ISA with one provider in any tax year – you can't split it. However you can hold cash-ISAs from different years with different providers.
The UK's Top Cash ISAs
In general, the higher the interest, the better. Yet cash ISA providers play the same tricks as savings account providers, such as short-term bonus interest rate hikes to attract your custom, and annual limits on withdrawals. Also a few have transfer penalties, meaning if you try and shift to another provider you're charged. However, none of the following do.
The Top No-Notice Needed Accounts
- Top Payer: 6.25% AER but skewed due to a bonus
The Barclays Instant Access Tax Haven ISA pays 6.25% AER on all balances from £1. It’s only available in branches, unless you’re an existing Barclays customer in which case you can get it online too. The rate includes an introductory 1% bonus lasting a year; meaning it’ll plummet after that, thus it’s best for people who are willing to do a Transfer then to keep the rate high.
WARNING: MoneySavers who are not current Barclays customers have reported some substantial delays opening this cash ISA (see Tax Haven feedback). Barclays has confirmed that it takes around three to four weeks to open, but importantly any interest earned will be backdated to the 15th day after your application so the overall financial effect shouldn’t be a problem. Many people have also been asked to meet with a Barclays ‘financial adviser’ when they apply – this is of course usually an attempt to flog you more Barclays products – so beware.
Rate: 6.25% variable AER (inc. 1% 12 month bonus). Min. Deposit: £1. Allows transfers from previous years ISAs?: No, new money only
- Top Clean Account: 6.1% AER plus strong guarantee
Icelandic Bank Icesave’s Easy Access ISA pays a clean rate of 6.1% AER (meaning no short term bonuses); better still the rate is guaranteed to be at least 0.3% above UK base rate until the end of Jan 2011, and then at least base rate for a further two years. This means you can leave your money here and be assured of a decent rate for three years.
You have to apply online and the minimum opening balance is £1,000 but after that you can withdraw money penalty-free whenever you want. It will also allow you to shift previous years' cash ISAs in (see Cash ISA Transfers article for more details). The next best online ISA is from Egg*, which pays 6.05% AER from £1, though this doesn't allow transfers in.
IMPORTANT. Icesave, unlike some foreign banks, hasn’t chosen to be completely protected under the UK's Financial Services Compensation Scheme, and thus if, in the unlikely event that it were to go bust, getting the money back could be more difficult. See the Are Your Savings Safe? guide for a full explanation, and Martin’s Icesave safety blog.
Rate: 6.1% variable AER. Min. Deposit: £1,000. Allows transfers from previous years ISAs?: Yes
- Top Rate, but not for everyone: 6.25% AER with online access only
It's possible to match Barclays, without the inconvenience of a short-term bonus rate hike. HSBC's* Cash e-ISA pays 6.25% AER on all balances from £1. However, this is only available for HSBC current account holders; this is highly uncompetitive account and not worth opening just to get the ISA (see Best Bank Accounts for the top payers). Yet if you already have a HSBC account, this is the top paying ISA, and the best place to stash your cash.
It can be opened online only, but instant, penalty-free withdrawals are available in-branch or by phone, as well as via the web. This is for new ISA savings only; if you want to transfer ISA money from previous years, read Cash ISA Transfers. However, you can freely move cash from this ISA to another provider at any time, for no charge.
Rate: 6.25% variable AER. Min. Deposit: £1. Allows transfers from previous years ISAs?: No.
To see how switching will affect your savings, use the ISA Savings Calculator and input the interest.
The ISA clock is counting down the time left in this ISA year.
Remember rates change and fixed rates are possible
Cash ISAs are generally 'variable rate'. This means they move both with the Bank of England base rate and for providers' own competitive reasons. Always check every six months or so that your rate is still competitive. If not, transfer to a better payer.
The alternative is to use a fixed-rate cash ISA, which is a good option if you don't think you'll need regular access to your cash. While this means your money is supposedly locked away for 1 to 5 years, providers are forced to permit withdrawals, usually with an interest penalty of between 60 and 180 days. At the moment, the best is Skipton BS's Fixed Rate Cash ISA at 6.5%.
This means you can take advantage of guaranteed earnings if interest rates begin to drop, but have a way out if they start to rise and better deals are available elsewhere. For a full list of fixed rate ISAs use the MoneySupermarket* (select Bond or Term accounts) comparison or Moneyfacts.
The Savings Calculator
Below is a special calculator designed to tell you all you need to know about your ISA savings. Simply enter all the details, and it'll give you the answer. For increased accuracy use the AER (Annual Equivalent Rate) which should be listed on your statement. Obviously as most accounts' interest rates are variable, the calculations will change if the rate does, but the calculator should give you a good idea.
The calculator assumes you put money in at the beginning of each month, so if this isn't how you do it, the answers will be ever-so-slightly out. If you don’t make regular deposits but put in lump sums, figure out the monthly equivalent for a rough answer. Feel free to play with the results to see how your savings are impacted
If you already have a Cash ISA either from this or previous years don't assume you're stuck. It's possible to transfer to a higher paying provider (most will accept transferred cash ISA money).
Do check your existing provider isn't one of the very few which levy a penalty for transferring out though. If it does, weigh up this cost against the gain in increased interest.
A word of warning though: don't simply withdraw the cash. Do that and the ISA is lost. Always ask the new provider about its transfer procedure. (For full details read the Cash ISA Transfers article).
A basic rate taxpayer saving £3,000 over three years, in a poor savings account, of which there are sadly many, would earn £70 interest. In a top savings account it's £500, but the same amount in the top cash ISA, as it's tax free, earns £580. Yet not all cash ISAs are the same, one of Northern Rock's pays a paltry 4.79%, meaning it'd underpay the market leader by £130 in interest.
The benefits are even bigger for higher rate taxpayers; then the top cash ISA outperforms the top savings account by £215.
| Interest earned on £3,000 over 3 years | ||||
| Interest Rate | Untaxed | Basic Rate Tax | Higher Rate Tax | |
| Poor Savings Account (1) | 0.75% | £70 | £55 | £40 |
| Top Savings Account (2) | 6.50% | £620 | £500 | £375 |
| Northern Rock ISA (3) | 4.29% | £400 | £400 | £400 |
| Top ISA (4) | 6.25% | £600 | £600 | £600 |
| Assumes rates are stable (1) Halifax Liquid Gold (2) Kaupthing Edge (3) Northern Rock's Instant Access Cash ISA (4) HSBC e-ISA | ||||
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