Interactive Investor

Cash Isa rates finally rising: here's why they're still a good place for your money

19th February 2019 12:42

Stephen Little from interactive investor


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Interest rates on Cash Isas are gradually rising and offer a safe haven, especially for taxpayers who have gone over their personal savings allowance

Low interest rates and higher-paying alternatives mean the popularity of Cash Isas has declined in recent years.

And since the introduction of the personal savings allowance in 2016, savers have been further shunning Cash Isas.

The personal savings allowance lets basic-rate taxpayers receive £1,000 of cash interest tax free each year, while higher-rate taxpayers can earn £500 tax free. Additional-rate taxpayers don’t have this allowance.

Cash Isas have also fallen out of favour because of rock-bottom interest rates on savings.

This has led to many savers putting their cash into higher-paying savings accounts.

Despite their fall from grace, Cash Isas remain important for people looking to save tax-free above their personal allowance limit, You can save up to £20,000 each year into a Cash Isa.

Once you exceed the £1,000 personal allowance, you start paying tax on your interest so a Cash Isa is still a good bet for savers with larger pots or for higher-rate taxpayers.

As the Cash Isa does not count towards your personal savings allowance, you can use it in addition to the £1,000 you get tax free with the allowance.

Once you go over the personal savings allowance limit, the 20% tax rate on interest kicks in. This means that for every £100 interest accrued basic-rate taxpayers will only earn £80.

For higher-rate taxpayers, savings interest is taxed at 40%, meaning they can save even more by with a Cash Isa. There is also the possibility that the personal savings allowance limit could drop or even be scrapped in the future.

The good news is Cash Isa rates are on the rise again, with increased competition among providers helping to push rates up.

Data from Moneyfacts shows that the average one-year Cash Isa rate reached its highest level in January in three years to stand at 1.35% – up from 1.08% a year ago.

The average interest rate offered on easy-access Cash Isas has also risen, going up 0.21 percentage points to 0.94% in the year to January 2019.

Transfer for a better rate

However, savers should be careful as some high-street Cash Isas offer paltry returns with interest rates even lower than the Bank of England’s base rate of 0.75%.

This includes the Barclays Instant Cash Isa, the Santander EISA and the TSB Cash Isa Saver, which all pay 0.6%. Even lower are the Nationwide Instant Isa Saver and the Yorkshire Building Society Instant Isa, both at 0.5%.

Fortunately, you can transfer your Isa from one provider to another at any time if you are unhappy with the rate you are getting. All you have to do is contact your Isa provider and fill out an Isa transfer form. However, remember that although you won’t lose any tax benefits you could face a penalty depending on the terms of your agreement, such as if the account is a fixed rate for a specific period such as one year or two. Be careful not to withdraw your money too early if this is the case.

Be careful as some Cash Isas offer paltry interest rates as low as 0.5%

Get hold of your money whenever you want

With interest rates so low, it is as important as ever to shop around to make sure your money is working as hard as possible.

Easy-access Cash Isas provide a great way of getting hold of your money whenever you want. However, easy-access rates are typically lower than fixed rates and you may find that withdrawals are limited.

The best easy-access deal currently is the Virgin Money Double Take E-Isa Issue 5 at 1.45%. However, bear in mind with this account that you are limited to two withdrawals a year. If you exceed this, the bank will slash your rate.

Alternatively, you might want to consider the Shawbrook Bank Easy Access Cash Isa, paying a rate of 1.43% to savers putting in at least £1,000. You can withdraw your cash at any time but the minimum withdrawal is £500.

Isa limits are set to remain the same in the 2019 tax year at £20,000. However, it is important to be aware that if you decide to withdraw money from your Isa, you may not be able to it add to it if you have reached your allowance. For example, if you have saved £20,000 and withdraw £1,000 you would you would have to wait for the next tax year to put another £1,000 into your Isa.

Some providers do offer flexible Isas that allow you to withdraw money and put it back into the account in the same tax year. If you do this, the money replaced won’t count towards your final allowance.

The current top rate with no withdrawal restrictions is from Paragon Bank, which is paying 1.35%.

Most providers that offer this feature only do so with their variable rate Isas. The rates are also often lower than the market leaders.

Remember, you can spread your £20,000 limit across multiples types of Isa – you don’t have to just put it all in cash. For example, you could put £10,000 in cash and £10,000 in stocks and shares.

Notice accounts

Rates for notice accounts can be higher than those offered by instant access, but you will need to tell your bank or building society in advance that you want to withdraw money.

The Charter Savings Bank 95 Day Notice Cash Isa is currently the best notice account on the market with a rate of 1.45%. You can open an account online with £1,000 but it requires 95 days’ notice to withdraw cash.

Fix for a better return

To get the highest interest rates on offer, you will need to look at a fixed-rate account. With one of these, you must lock your money away for the whole term, usually between one and five years. Penalties are charged if you need to access your money early.

Over five years, the top rate is currently the Leeds Building Society Five Year Fixed Rate Isa at 2.12%, fixed until 1 April 2024. You can open the account online with an initial investment of £100.

The Family Building Society and Newcastle Building Society are both offering the next best rate at 2.1%.

For three years, the top rate comes from Coventry Building Society at 2.05%, which you can open with only £1.

The best two-year rate on offer is 1.9%, again from Coventry Building Society, while Charter Savings Bank pays 1.87%.

Cynergy Bank, paying 1.74%, is the top one-year fixed-rate Cash Isa. The next best rate is 1.7% from Coventry Building Society, but this is fixed until 31 May 2020.

All rates were correct on 12 February 2019, but are subject to change.


Account Type Headline rate Minimum and maximum balance Open account Notes
Virgin Money Double Take Cash E-Isa Issue 5 Easy access 1.45% £1 upwards Online only Accepts transfers
Charter Savings Bank 95 Day Notice Cash Isa Notice account 1.45% £1,000 upwards Online only 95 days' notice to withdraw cash
Cynergy Bank Fixed Rate Cash Isa One-year fixed rate 1.73% £500 upwards Online only Withdrawals are subject to 180 days' loss of interest on the amount withdrawn
Coventry Building Society Fixed Rate Isa Two-year fixed rate 2.05% £1 upwards Branch, online, post Fixed until 31 May 2021
Coventry Building Society Fixed Rate Isa Three-year fixed rate 2.05% £1 upwards Branch, online, post Fixed until 31 May 2022
Leeds Building Society 5 Year Fixed Rate Cash Isa Five-year fixed rate 2.12% £100 upwards Branch, online, post Fixed until 1 April 2024

Source: Moneywise, 12 February 2019

This article was originally published in our sister magazine Moneywise, which ceased publication in August 2020.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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