A cash ISA is simply a tax free savings account every UK adult can now put up to £5,100 per tax year in. Once in it remains tax-free year-after year, but if you don't use a year's allocation you lose it.
This daily updated guide compares the best buys and includes a free calculator to work out the gain.
In this guide
What is an ISA?
For ten 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?
A cash Individual Saving Account (ISA) is just like a normal savings account - you can take cash out whenever you want, the only difference is the interest isn't taxed.
Basic-rate taxpayers must normally hand over 20% of their savings interest to the taxman, higher rate taxpayers 40% - but in an ISA, you keep that. In other words basic rate taxpayers earn a quarter more interest at the same rate in a cash ISA, and higher rate taxpayers two-thirds more.
Everyone aged over 16 can save a limited amount in one each tax year (which starts on the 6 April and ends the following 5 April) and the real kicker is...
For the current 2010-11 tax year the annual ISA allowance has been increased to £10,200 (from £7,200), however only £5,100 (£3,600) of that may be used for a cash ISA
Yet many providers gleefully steal your advantage by paying disgustingly low rates like 0.1%, which is why its important to use the best-buys below to ensure you maximise its use.
However there are many confusions with cash ISAs, so to spell it out....
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Money may be withdrawn at any time without losing tax benefits.
Providing you've picked an easy access ISA you can withdraw the money whenever you want just like a normal savings account, the key thing to remember though is once the money's withdrawn, it can't be returned.
An example should help... say you save £4,000 that leaves you £1,100 left to put in. then two months later, still in the same tax year, you take out £2,000 you can still ONLY put £1,100 back in.
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 but if you don't use it, you lose it.
This means literally once that years closed you cannot put another penny in that specific cash ISA - so if you put in nothing in the 2009-10 year that's it its gone. If you put £2,000 in even though that year's maximum was £3,600 - the year is closed you can't now top it up.
Yet if you do put the cash in in-time, you can keep it in there, tax-free for as long as you like.
And as soon as the neew tax year starts on the next 6 you can put a whole new year's allowance in - and from April 2010 this is £5,100.
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You can have lots of ISAs but only from different years.
The golden rule is you can only open a cash ISA with one provider in a tax year you can't split it. However you can hold lots of different cash ISAs from different years with different providers.
So if you opened a cash ISA with Barclays two years ago, you don't need stick with it for this years cash ISA you can choose whomever the top payer is.
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If you've got ISAs from past years - you can transfer to up the rate
ISA providers love us to think once our money's in, its a done deal. This is wrong, you have a right to transfer past years cash ISAs to the new best buys - and if you've got serious cash saved in them, this can make a massive difference.
For full pros and cons on this, and which top paying cash ISAs allow you to transfer see the full cash ISA transfers guide.
How safe are your savings?
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...
While that sounds simply, the exact rules are more complex - not every bank in the UK is a UK regulated (e.g. Post Office savings aren't) and there are complex rules involving how different banks are registered and what counts as a financial institution. For a full briefing read the full Are My Savings Safe? guide.
How to maximise safety
If you've more than £50,000 of savings (including cash ISAs and others) in one bank then in the unlikely event 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 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 our preferred option is to report the top rates regardless, but let you know if its not covered by the UK protection.
The UK's Top Rate Cash ISAs
In general, higher interest is better, yet tricks like short-term bonus interest rate hikes, limited withdrawals and transfer penalties abound - so below we explain them and you need prioritise.
Most cash ISAs are 'variable rate', meaning they move both with the Bank of England base rate and providers' own competitive reasons, so whatever you plump for check reguarly the rate's still competitive and if not transfer it.
Alternatively consider the top Fixed Rate Cash ISAs section, plus check branches of smaller building societies, which often have good rates for locals.
The Top Rate Accounts
3.2% AER, but ONLY Santander/A&L bank account customers
Guaranteed 2.7% above base rate. No transfers.The flexible cash ISA from Santander and Alliance & Leicester (there's no info on the websites) pays 3.2% (min £1) which guarantees to be 2.7% above base rate for the first year. However, you have to be an existing current account holder (using it as your main current account) and you must go into a branch to get one.
While this is currently the top rate, after a year the rate'll almost certainly plummet, so make sure you transfer to a new top provider then. The downside here is it's only for new ISA money; you can't transfer old cash ISAs into it, so if that's what you're after check the other top picks.
Quick Stats. Rate: Guaranteed min. 3.2% AER for a year, always at least 2.7% above base rate. Min. deposit: £1. Allows transfers from previous years' ISAs?: No Penalties for transferring out?: No Access: Online/Branch/Phone Principality Building Society 2.8% AER
Online. Accepts transfers in. 1% bonus for 1 yearFor non A&L/Santander customers the highest paying instant access rate is Principality's e-ISA (issue 2) paying 2.8% including a 1% bonus for 12 months. You can save any amount over £1 and it accepts transfers in from previous years ISAs.
Principality BS has the full £50,000 UK savings protection, for more info read the Savings Safety guide.
Quick Stats. Rate: 2.8% variable AER inc 1% bonus. Min. deposit: £1. Allows transfers from previous years' ISAs?: Yes Penalties for transferring out?: No Access: Online Birmingham Midshires 2.7% AER
Accepts transfers in. 1% bonus for 15 monthsAlternatively, the ISA extra from Birmingham Midshires offers 2.7% AER including a bonus of 1% for 15 months. The minimum deposit allowed is £500.
Birmingham Midshires is part of the HBOS group, so it shares one lot of £50,000 UK protection with Halifax/Bank of Scotland, Intelligent Finance, The AA and Saga. If you have savings with any of these make sure you don't go over the limit, read more in the full Savings Safety guide.
Quick Stats. Rate: 2.7% variable AER inc 1% bonus. Min. deposit: £500. Allows transfers from previous years' ISAs?: Yes Penalties for transferring out?: No Access: Post The AA 2.7% AER
From £500. Online/post. Accepts transfersThe Access cash ISA from The AA pays 2.7% including a 1% bonus for 12 months. The minimum deposit allowed is £500 and you can either apply for the online or postal version of the account. Only the postal account allows transfers in.
The AA's £50,000 UK savings safety guarantee is shared across any accounts you have with the HBOS group - see the Safe Savings guide for full details.
Quick Stats. Rate: 2.7% AER, inc 1% bonus for a year. Min. deposit: £500. Allows transfers from previous years' ISAs?: Yes Penalties for transferring out?: No Access: Online/post 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...
Therefore they're mainly suitable for those happy to lock cash away for the entire term - meaning you lose the flexibility to ditch and switch to a better payer if the rate is no longer competitive..
The Best One Year Fixed Rates
If you can spare access to your cash for a year you'll get slightly a higher rate than instant-access accounts offer:
Aldermore 3% AER
From £1,000, apply online
The highest one year fixed rate ISA is from Aldermore Bank, paying 3% fixed for 12 months. The minimum deposit allowed is £1,000, although you can only make one deposit. You can also transfer in previous years' ISA money. The account can be opened by online.
You may not have heard of it, but Aldermore is the new name for private bank Ruffler, it is covered by the usual £50,000 FSCS protection.
Quick Stats: Rate: 3% fixed AER. Deposit: £1,000 Allows transfers from previous years' ISAs?: Yes Withdrawal Penalty?: 120 days interest Access: Online/Phone/Post
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.
CHELSEA BS 3.3% AER
From £100, apply online
The highest payer is the fixed rate e-ISA from Chelsea BS is paying 3.3% fixed until 30 September 2012. The minimum deposit allowed is £100, and you can also transfer in previous years' ISA money. The account can be opened by online.
Chelsea BS shares its FSCS protection with Barnsley BS and Yorkshire BS, so you get £50,000 protection across the three societies.
Quick Stats: Rate: 3.3% fixed AER. Deposit: £100 Allows transfers from previous years' ISAs?: Yes Withdrawal Penalty?: 180 days interest Access: Online
The Best Three Year Fixed Rates
It's possible to push the rate up even further, by sacrificing access to the cash for longer. Yet here you are taking a bigger gamble on rates staying low for a significant period; if UK interest rates recover between now and 2013, you could lose out as your cash is stuck at this rate.
Nationwide 3.75% AER
From £1, branch only.
The Nationwide 3 year fixed rate ISA pays 3.75% AER on balances over £1. Although the account can only be opened in branches. You can transfer in previous years' ISA money.
Quick Stats: Rate: 3.75% fixed AER. Deposit: £1 Allows transfers from previous years' ISAs?:Yes Withdrawal Penalty?: 270 days interest Access: Branch
Use the net to compare top rates
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 see Cash ISA Transfers for the best accounts that let you move money in.
The Savings Calculator
When using the calculator below 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 answers will change if the rate does, so use the calculator as a rough indicator of the likely outcome only.
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 £5,100 over three years, in a poor savings account, of which there are sadly many, would earn £6 interest. In a top savings account it's £343, but the same amount in the top cash ISA, as it's tax free, earns £490. Yet not all cash ISAs are the same, one of Halifax's pays a paltry 0.1%, meaning it'd underpay the market leader by over £480 in interest.
The benefits are even bigger for higher rate taxpayers; then the top cash ISA outperforms the top savings account by over £230.
Interest Rate | Untaxed | Basic Rate Tax |
Higher Rate Tax |
Additional Rate Tax |
|
|---|---|---|---|---|---|
Poor Savings Account (1) | 0.05% | £8 | £6 |
£4.50 |
£4 |
Top Savings Account (2) | 2.8% | £440 | £350 |
£265 |
£220 |
Poor ISA (3) | 0.2% | £30 | £30 |
£30 |
£30 |
Top ISA (4) | 3.2% | £505 | £505 |
£505 |
£505 |
Assumes rates are stable (1) Halifax Liquid Gold (2) The AA (3) Halifax variable rate ISA (4) Santander Flexible ISA | |||||
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