Cash Isas have always been the absolute no brainer when it comes to saving. But are they still?

As they are simply normal savings accounts where interest earned is not taxed, it has always made complete sense to maximise your Isa allowance before stashing any cash in a taxable savings vehicle.

But over recent months, banks and building societies have been wielding an axe to the rates paid on cash Isas, chopping them to such an extent that, on first glance, the returns look poor in comparison to a taxable account.

Providers stand accused of effectively pocketing savers' tax relief as Isa rates and pre-tax normal savings rates have traditionally been similar.

So should you still save in a cash Isa? The simple answer for those who pay tax is still, yes (see the Cash Isa guide).

Tax breaks

Research by MoneySavingExpert.com shows the returns offered by the top cash Isas are often still higher than, or at worst equal to, the returns on the top equivalent taxable accounts, due to the tax breaks.

Higher rate taxpayers, in particular, reap the benefits most, even if not by quite the same margin as in previous years.

For instance, for deposits under £9,000, the top current easy access cash Isa pays 2.65% while the top easy access taxable account pays 3.15% (see the Top Taxable Savings guide).

After tax, a higher rate taxpayer who deposits £3,600 and leaves it in for 12 months would earn £95 interest a year in the Isa and £68 in the taxable account, a £27 difference (see tables below).

If your existing Isa is not yielding anything like those returns, then switch (see the Isa Transfer guide).

The tables below show the after-tax annual interest earned if you deposited £3,600 in a cash Isa or taxable savings account and left it for a year.

Isas vs taxable savings - easy access annual return
Top taxable savings accounts - £3,600 deposit
Rate Return - basic rate taxpayer Return - higher rate taxpayer
3.15% £91 £68
3.01% £86 £65
Top tax-free cash Isas - £3,600 deposit
Rate Return - basic rate taxpayer Return - higher rate taxpayer
2.65% £95 £95
2.58% £92 £92
Assumes money untouched for a year

Isas vs taxable savings - 1-year fix annual return
Top taxable savings accounts - £3,600 deposit
Rate Return - basic rate taxpayer Return - higher rate taxpayer
3.65% £105 £78
3.5% £101 £75
Top tax-free cash Isas - £3,600 deposit
Rate Return - basic rate taxpayer Return - higher rate taxpayer
3.33% £120 £120
3.05% £110 £110
Assumes money untouched for a year

Think long term

It's not just about short-term gain.

You can only save up to £3,600 per tax year (April-April) in a cash Isa if under 50 and £5,100 if older. From 6 April, everyone will be able to save £5,100 a year (see the Isa limits to rise MSE News story).

So if you fail to use your allowance this tax year, or in any tax year, it is gone for ever.

If you deposit £3,600 this year and don't touch it for 20 years, assuming the Government keeps Isas, that's 20 years' tax-free interest.

Martin Lewis, MoneySavingExpert.com creator, says: "Even though the rate benefit of a cash Isa is sometimes miniscule at present compared to a normal account, the long-term benefit is what counts. When you put money in a cash Isa it says tax-free year-after-year.

"So it's important if you have savings to fill up your allocation. My suspicion is this year's cash Isa rates will start to rise soon as we get into the competitive Isa season from March to July when providers know people are putting their money away."

This article was updated on 2 February for inclusion in the free weekly email, to take account of updated rates.

Further reading/Key links

Top rates: Cash Isas, Isa Transfers, Full Isa guide, Top Taxable Savings

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