A cash ISA is simply a tax-free savings account, where you can put £3,600 (or £5,100 if you are 50) every tax-year but if you don't use it, you lose it. This daily updated guide compares best buys and includes a free calculator to work out the gain.
What is an ISA?
For seven 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!
For a more detailed explanation of ISAs, (don't worry it still includes the cakes) see the ISA Guide.
How do Cash ISAs work?
While the annual ISA allowance is £7,200, only £3,600 may be put in cash. These limits increased in the April 09 budget, to £10,200 and £5,100 respectively, and are in force now for anyone 50 or over by 5 April 2010, and from next tax year (6 April 2010) for everyone else.
The best route for cash money 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 a quarter more interest at the same rate in a cash ISA, and higher rate taxpayers two-thirds 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Money may be withdrawn at any time without losing tax benefits.
Yet once the money's withdrawn, it can't be returned.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: someone under 50 puts £2,400 in, so 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 The fact you've withdrawn the money doesn't change anything.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 cash 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 year's allowance in - and from April 2010 this will be a bigger £5,100.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.
How safe are your savings?
Bank collapse was once easy to dismiss, then the credit crunch and global market turmoil hit. The UK soon found itself bailing out Northern Rock, and the US authorities followed for even bigger bank Bear Stearns. This means these days every sensible saver should ask “is my money safe?.
The answer is quite simple. Provided your money is in a UK regulated bank or building society account, it’s protected under the Financial Services Compensation Scheme (FSCS) and its golden rule counts for Cash ISAs too...
The first £50,000 per person, per financial institution is guaranteed.
Sadly this is the simple face of savings safety; the exact rules are more complex involving how different banks are registered and what counts as a financial institution. For full info read the full Are My Savings Safe? guide.
How to maximise safety
Unless you've done very well in terms of earning interest, any cash ISA balance is unlikely to top this £50,000 limit, so there's likely to be no problem. Yet if you have further savings in other accounts with the same bank or building society, then in the unlikely even that it went bust only the first £50,000 in fully guaranteed, so for total peace of mind don’t put more than this in any one institution; spread it around.
For those with very large amounts of savings (for example a house sale) this could lead to lots of accounts, even if you've too much to stick to the £50,000 limit for each one, the general rule of not having all your eggs in one basket still works. For more info see the how to get 100% safety section of the savings safety guide.
This guide and best buys
It's impossible to pick "which bank is in trouble?", we've seen great names of world banking like Goldman Sachs and Merrill Lynch in trouble. Therefore the only solution for this site is that we'll report the top rates regardless, alongside explaining any 'protection oddities'. So far, world governments have reacted to protect their banks and no savers have lost money, and its likely (though not certain) that will continue.
The UK's Top Rate 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.
As Cash ISAs are generally 'variable rate', meaning they move both with the Bank of England base rate and for providers' own competitive reasons, so check reguarly that your rate is still competitive. If not, transfer to a better payer. For alternatives to monitoring interest rates, read the Fixed Rate Accounts section.
All the accounts below accept deposits up to the new £5,100 limit for over 50s, either as new deposits or top-ups of existing ISAs.
Unless stated, all the accounts have full protection under the £50,000 per person, per institution rules. Though do check how institutions are linked and other notes in the safe savings guide.
The Top Rate Accounts
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First Direct 2.75% Online, guaranteed rate. Accepts transfers
The top rate's with First Direct's cash e-ISA, which pays 2.75% AER fixed until 31 August 2011. Despite the guaranteed rate, It’s instant access and you only need to save £1 to open it. After August 2011, the rate drops to 0.2% AER, so transfer out at that point.
It also usefully allows transfers in from previous years' cash ISAs, except those held with First Direct. It's an online only account, and you can start saving from £1.
Quick Stats. Rate: 2.75% AER, fixed until 31 August 2011. Min. Deposit: £1. Allows transfers from previous years' ISAs?: Yes Access: Online -
Standard Life 2.65% AER Online, clean account
Alternatively, Standard Life offers 2.65% AER from £1. It also allows transfers in of previous years money, with no notice periods or penalties when making withdrawals.
From 1 Jan 2010 Standard life and Barclays merged, however at the moment they both have their own separate £50,000 FSCS protection. This is likely to change in the future though, so keep an eye on the weekly email for any updates.
Quick Stats. Rate: 2.65% variable AER. Min. Deposit: £1. Allows transfers from previous years' ISAs?: Yes Access: Phone/Online -
Get up to 3% AER. Boost the rate, but cash semi-locked away.
Two accounts pay around 3% but you must give up some flexibility for your cash. Both require specified notice periods in order to withdraw or transfer out to another ISA provider, yet if you can plan ahead, simply diarise to tell them in advance.
Manchester BS's Premier ISA Issue 4 pays 3.01% AER, including a 1% bonus for the first twelve months. You need a minimum balance of £1,000 and must give 60 days notice to get at the cash. The account can be operated by branch, phone or post, but not online
As an online alternative, Newcastle BS's Reward ISA pays 3%, with 1% of that a year-long bonus. Here the notice period is a large 120 days, but if you want to ditch and switch for when the bonus ends, just diarise the right date to give your notice. Got an old ISA... up its rate to 3%!
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). There are currently a range of best buy cash ISAs which ONLY allow transfer money in, not new money, for details on these see the Cash ISA Transfers guide.
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.
The Top Fixed Rate Accounts
If you're willing to lock your cash away there are some alternatives which guarantee a decent rate for a set period of time. Yet do remember...
Fixed rate ISAs give a guaranteed rate for a set period, but you can’t take your money out during that time.
Therefore they're only suitable anyone happy to lock cash away for the entire term; you lose the flexibility to ditch and switch to a better payer if the rate is no longer competitive, or if something changes in its safety stakes. (While 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).
Top One Year Fixed Rate
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Bank of Cyprus, 3.33% AER. Important! Not protected by UK safety scheme
The highest rate with the Bank of Cyprus Cash ISA Bond, paying 3.33% AER on amounts above £1 in this telephone or post account. Transfers in from previous years’ ISAs are allowed within 6 weeks of opening the account, plus you can withdraw money, although you will be charged 180 days worth of interest.
Importantly, the account is NOT protected by the UK scheme but is totally reliant on the small Cypriot government to pay out if the bank goes bust. The Cypriot protection scheme covers the first €100,000 (c. £90,000). See the foreign banks section of the Are Your Savings Safe? guide.
Quick Stats. Rate: 3.33% fixed AER. Min. Deposit: £1. Allows transfers from previous years' ISAs?: Yes Access: Phone/Post - Aldermore 3.05% AER
Alternatively, the Aldermore Fixed Rate ISA pays 3.05% AER for twelve months. You need a minimum of £3,600 and is operated online, by post or over the phone, and it does allow transfers from previous years' ISAs.
Quick Stats. Rate: 3.05% fixed AER. Min. Deposit: £3,600. Allows transfers from previous years' ISAs?: Yes Access: Online
Top Deals of other lengths
If you want to lock your cash away for longer, other length deals are available, yet in the current climate there's little guidance on where rates will be in a few years time. If you choose to lock your cash away for several years now, fixed rates could improve, meaning you'l be locked into a non-top pick account.
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Two years, 3.6% AER
The highest payer is Aldermore's Two Year Fixed Rate ISA, at 3.6% AER. You need a minimum of £3,600 and is operated online, by post or over the phone, and it does allow transfers from previous years' ISAs.
If you have less to save, the fixed rate ISA from Halifax* (min £500) pays 3.5% AER, although you can only make one deposit. The account can be opened online, in branches and by phone and you can transfer in previous years. -
Three years, 4% AER
If you can save over £500 Marks & Spencer's 3 Year Fixed Rate ISA pays 4% AER. The account allows transfers in from previous years' ISAs. It can be opened online, but only operated by telephone or post.
Aldermore's Three Year Fixed Rate ISA, also pays 4% AER, though here you need a minimum of £3,600. It's operated online, by post or over the phone, and it does allow transfers from previous years' ISAs.
Fixed Rate deals can change regularly, for a full list of fixed rate ISAs use the MoneySupermarket* (select Cash ISAs and then Bonds) comparison or Moneyfacts.
What about Toisas?
The Tessa only ISA, tongue twistingly known as a Toisa, was another special tax-free product. Old style TESSAs, the forerunner of the cash ISA, lasted for five years and then matured. If this occured any time between 1999 and 2004, the TESSA automatically turned into a Toisa.
Since April 2008, all Toisas have become simple Cash ISAs, meaning all normal ISA rules apply. You can no longer add funds to an old Toisa, but if you have any money left in one, you can transfer it and up the rate. You're then able to add funds to transfered Cash ISA account. See Cash ISA Transfers for the best accounts that let you move money in.
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.
A basic rate taxpayer saving £3,600 over three years, in a poor savings account, of which there are sadly many, would earn £3 interest. In a top savings account it's £295, but the same amount in the top cash ISA, as it's tax free, earns £333. Yet not all cash ISAs are the same, one of Virgn's pays a paltry 0.1%, meaning it'd underpay the market leader by over £320 in interest.
The benefits are even bigger for higher rate taxpayers; then the top cash ISA outperforms the top savings account by over £100.
Interest earned on £3,600 over 3 years
Interest Rate | Untaxed | Basic Rate Tax | Higher Rate Tax | |
Poor Savings Account (1) | 0.05% | £5 | £4 | £3 |
Top Savings Account (2) | 3.3% | £367 | £294 | £220 |
Poor ISA (3) | 0.1% | £11 | £11 | £11 |
Top ISA (4) | 3% | £333 | £333 | £333 |
Assumes rates are stable (1) Halifax Liquid Gold (2) Citibank (3) Virgin Cash ISA (4) First Cash ISA | ||||
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