This content originally appeared in the MSE weekly email on 1 April 2015.
The tax year ends this Sunday 5 April, so there are just days left for any UK over-16 to use their £15,000 tax-free cash ISA savings allowance.
But don't let ISAs scare you. I wish I could hypnotise the nation so that when you hear "cash ISA" it's auto-replaced with...
"A SAVINGS ACCOUNT THAT YOU DON'T PAY TAX ON"
Anything you can do with normal savings such as 'take your money out the next day' you can do with cash ISAs too. Plus all the below have the full £85,000 savings safety protection. Here are the 10 need-to-knows...
1. Why your money's nicer in an ISA.
The gain's simple. Earn £100 interest in a savings account and after 20% basic tax, you only receive £80 – after higher rate, £60. In a cash ISA, you keep the whole £100. So, as long as rates are similar, ISAs win and top ISAs tend to beat top normal savings anyway.
See how cash ISAs work.
2. Use it or lose it (and if you use it, it lasts for years).
Once money's in a cash ISA, it stays tax-free YEAR AFTER YEAR. So, filling your cash ISA means you can future-proof your savings against future tax. Even though rates are crap now, when they bounce back, as you'll earn more interest, it could be very valuable.
Someone who'd filled their ISA allowance every year since they started in 1999 could now have getting on for £100,000 (including interest) protected.
And if you're saying 'why bother, I get another allowance next year', doing it now is still good practice, just in case you have an unexpected windfall next year.
3. Top 1.5% cash ISAs if you know you need to access your cash.
As cash ISAs are just "a savings account you don't pay tax on", like normal savings, there are easy-access cash ISAs where you can put cash in today and withdraw whenever you want. Here are the top payers...
The Post Office's 1.5% ISA accepts new money and lets you transfer in old ISAs too. There's also Skipton BS's ISA and NS&I at the same rate, but only for new money.
Newcastle BS's 2.02% regular saver ISA pays more but you can only put £1-£1,250 in a month, yet if you'll carry on next tax year or have under £1,250 it's a winner. These rates are 'variable' so can change.
THE DEADLINE: While the tax year ends midnight Sunday, open one ASAP. Newcastle BS won't take applications after Thursday 3pm – the other two will accept them till late Sunday, yet unless you're already their customer bank transfers even via faster payments take 2hrs. See Bank-by-bank deadlines.
4. Most people should grab up to 2.25% cash ISAs.
Unless you KNOW you'll need the cash soon, fixed-rate deals pay more, give guaranteed interest and the ISA rules mean (unlike normal fixed savings) they can't lock your cash away – all they can do is levy early withdrawal penalties.
- Coventry BS 2.25% fix until November 2018 (no transfers, max £15,000) allows you to withdraw cash by closing the account and you lose just 120 days' interest – roughly a third of a year. Thus withdraw after a year, and you'd get 1.51%, beating the top easy-access deals. You must open it by Saturday.
- Virgin Money 1.65% 1 year fix (max £15,000) for new money and transfers. You can make partial withdrawals and lose just 60 days' interest on them.
- Kent Reliance 1.85% 2 year fix for new money (max £15,000) and transfers. You can withdraw but lose a serious 180 days' interest. Existing Santander 123 bank customers can get the Santander 123 2% 2 year fix for new money (max £15,000) and transfers with 120 days' closure penalties.
5. Earn 5% but taxed, if you're willing to switch bank account.
Cash ISAs easily beat top normal savings, yet a few bank accounts pay far higher rates on savings in them, as loss leaders to encourage you to switch. Even after tax the interest beats most top cash ISA rates. Plus as they're bank accounts you can withdraw whenever you want.
- For bigger savers, 3% interest + up to 3% cashback: Santander 123* is the only one which pays strong rates on a decent whack. You get 3% AER variable interest if you've £3,000 to £20,000 in it. That's 2.4% after tax for basic-rate taxpayers and 1.8% for higher-rate taxpayers.
It has a £2/month fee, but for most that's more than covered as it also pays cashback on direct debits paid from the account. You get 3% on mobile, phone, TV and broadband, 2% on energy and 1% on water and council tax. This earns some £10+/month.
- 4% AER on £4k-£5k: Club Lloyds* (that's 3.2% after basic tax, 2.4% higher).
- 5% AER up to £2,000: TSB* pays 5% (4% after basic tax, 3% higher).
- Free £125 + £5 each month you're in credit: Halifax Reward* pays this regardless how much you've got. As it's after basic-rate tax it beats TSB for most averaging under £1,500 in their account even before the £125.
- Want to save monthly, not a lump sum? Two 'free cash for switchers' bank accounts – First Direct* (free £125) and M&S* (free £100 M&S gift card) – also have linked 6% regular savers where you can save up to £300 and £250/month.
There are still some long-term reasons cash ISAs can win though – read a full analysis of the pros and cons in my Santander 123 v Cash ISAs blog.
The 'using bank accounts as savings' need-to-knows...
- Not everyone can get 'em. Most require... a) you to pass a credit check b) a min monthly deposit to be made c) you to set up a couple of direct debits.
- The rates are variable. So keep your eyes open in case they change.
- You can open more than one. This lets you save larger sums, but it can be tricky - for full help see the 5% Savings Loophole.
6. Consolidate old and new ISAs to boost rates.
Many old ISAs pay appallingly low rates – check yours. Yet you've a right to transfer them to a new provider to boost it. Plus combining new and old together makes transferring again in future (when rates change) easier.
Don't withdraw the cash though, as it'd no longer be in an ISA. Tell the new provider to transfer it for you. We note which of the best deals above allow transfers – there's a full rundown in our Top ISA Transfers guide.
7. You get a NEW £15,240 cash ISA allowance Mon 12.01am.
The brand-new ISA year starts next Monday, which means EVERYONE gets a brand-new, bigger cash ISA allowance of £15,240 to use then. The earlier it's open, the earlier your savings are tax-free.
BOOKMARK OUR TOP CASH ISAS GUIDE. IT'LL AUTO-UPDATE AT 00.01 THIS MONDAY 6 APRIL WITH THE NEW 2015/16 BEST BUYS.
There's nowt stopping you from opening this year's ISA today, and next year's on Mon - protecting £30,240 from the taxman in a week.
8. Want a Help to Buy ISA? Use this year's cash ISA, not next year's.
Last month's Budget announced the creation of a first-time buyers' Help to Buy (H2B) ISA to launch this autumn, where for every £200 you contribute £50 is added. We take you through it step-by-step in our Help to Buy ISA guide.
Yet in simple terms you can't open an H2B ISA and a cash ISA in the same tax year. So if you want a H2B ISA, for safety don't open a cash ISA from 6 April (so far better to fill this year's cash ISA allowance by Sunday). Yet there are ways round this, see H2B ISA & Cash ISA info.
9. If the '£1,000 tax-free interest' allowance comes in, aren't ISAs dead?
In the Budget the Chancellor announced plans that from April 2016, basic-rate taxpayers will be able to earn £1,000/yr interest without paying tax (higher rate £500).
Yet don't let that affect you now – firstly it's not done and dusted yet, and second even then there will be times ISAs win. For full info see my why ISAs are still winners note.
10. The tip of the ISAberg.
There's lots more info in our cash ISA guide that can help you. Here are just a few more pointers...
- Don't forget stocks and shares ISAs too. While I've focused on cash ISAs as that's our speciality, it's also the deadline for stocks and shares ISAs.
- 16-17 year olds can open regular AND junior ISAs. Children under 18 can put up to £4,000 in a top junior ISA or Child Trust Fund by Sunday too. Yet over-16s can also have a cash ISA as well.
- Beware ISA direct debits now. If you've an ISA direct debit, unless you want to keep using the same ISA next year, STOP IT. Even if it just makes one payment after 6 April, technically you've opened a new year cash ISA and can't choose a different one without transferring.
- Flexible ISAs start in the autumn. Currently you can only 'put in' £15,000 in a year. Eg, if you put in £10,000 you've only £5,000 left to put in, even if you later withdraw cash. From autumn, you'll be able to withdraw cash then put it back in – see new Flexible ISA rules.
And finally... struggling to get it in? Just put it anywhere. Not a rule for life, just for ISAs. If you miss the best buys or want to be safe about getting cash in, just open your own bank's easy-access ISA – even if the rate's pitiful, then once in, you've a right to do an ISA transfer to up the rate.