Average cash ISA rates are at their highest level since 2008, and with savings rates continuing to rise, it’s becoming increasingly important to shelter returns from tax.


According to financial website Moneyfactscompare.co.uk, the average return on an easy access ISA reached 3.00% gross at the end of August– the highest this rate has been since December fifteen years ago.

A spokesperson for Moneyfactscompare.co.uk said: “Average rates can give you an idea of whether you are getting competitive returns on your savings. Not only this, but they can provide an overview of how the market is performing. If average rates are rising, it may be worth reviewing your savings to ensure your provider is keeping up with market trends.”

There are plenty of cash ISAs which pay much higher rates than 3.00%, so if you can earn more elsewhere, it makes sense to vote with your feet and move your savings so you can earn more interest.

Bear in mind, however, that if you are transferring from one cash ISA to another, don’t close your account to move the money across or you’ll lose the tax benefits of your ISA. You should instead contact the provider you want to move to and they will arrange the transfer on your behalf.

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According to savings website SavingsChampion.co.uk, the top easy access cash ISA rate on offer is from Cynergy Bank, which pays 4.55% before tax on a minimum £1 deposit.

Chorley Building Society and Newcastle Building Society both pay 4.50% on their cash ISAs, which can also be opened with just £1, although each of these accounts only allow two withdrawals a year without penalty.

Tax benefits of cash ISAs

The biggest advantage of cash ISAs is that you don’t have to pay any tax on interest earned on your savings.

Despite this, many people have shunned cash ISAs in recent years not only because non-ISA accounts tend to offer higher returns, but also due to the personal savings allowance. This enables basic rate taxpayers to receive to up to £1,000 of interest and not have to pay tax on it.

Higher rate taxpayers - those earning more than £50,270 a year - receive a reduced personal savings allowance of £500, meaning any interest earned on savings over this figure will be taxed. Those earning over £150,000 don’t receive a personal savings allowance.

Interest rates have risen sharply in recent months, and with further increases likely, this means that the amount that savers can put away without paying tax on their returns has reduced. In the 2023-24 tax year it is estimated that over 2.7 million individuals will pay tax on cash interest, according to investment platform AJ Bell, up by a million in a single year.

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Calculations by Yorkshire Building Society show that a basic rate taxpayer would be able to hold £22,222 in a standard savings account if that account paid 4.5% in interest, without their returns exceeding the personal savings allowance and becoming liable to tax. A higher rate taxpayer could only hold £11,111 in the same account before the personal savings allowance threshold is met.

Chris Irwin, director of savings at Yorkshire Building Society said: “It’s no secret that savers have had a tough time over the last few years with unfavourable market conditions, and the temptation to move away from tax efficient wrapper of ISAs for higher rates on non-ISA products has been high.


“However, some savers may now be seeing for the first time that they exceed the personal savings allowance and face paying tax on their interest such is the combination of increased wages, higher savings rates and a reduced allowance for higher earners. That’s why it’s so important anyone putting money away regularly, or as a lump sum, understands both ISA and personal savings allowance rules.”