Savers piled £11.7 billion into Cash individual savings accounts (ISAs) in April, according to latest data from the Bank of England, the highest amount paid in since ISAs were launched in 1999.


Cash ISAs are popular because they enable savers to earn tax-free interest on their savings. It is possible to benefit from tax-free returns on cash held outside an ISA thanks to the Personal Savings Allowance, but only up to certain limits. Basic rate taxpayers, for example, can benefit from up to £1,000 in tax-free interest each year due to this allowance, higher rate taxpayers can get up to £500 and additional rate taxpayers get no allowance.

These allowances might sound generous, but increases in interest rates combined with frozen tax thresholds mean than it’s now much easier to exceed them.

Jeremy Cox, head of strategy at Coventry Building Society, said: “Millions of savers will be hit with a shock tax bill or stealth changes to their tax codes as they exceed their Personal Savings Allowances in this tax year.

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“Without the protection of an ISA, higher rate taxpayers need just £10,000 earning a ‘best buy’ rate of 5% before the interest they receive uses up their £500 Personal Savings Allowance. After that they would be hit with 40% tax on any additional interest they are paid.”

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Basic rate taxpayers need double this amount - £20,000 - in cash savings before they must start paying tax on their returns, so if you do have a decent chunk of savings, it’s well worth sheltering them in an ISA rather than a standard savings account.

Lucinda O’Brien, savings account expert at said: “Interest rates are normally slightly lower but the trade-off is that you won’t pay any tax on the cash you earn via the interest rate.

“Plum’s cash ISA is competitive at 5.17% and this includes a bonus rate of 0.88% for the first 12 months. However, there are some terms to adhere to, for example the balance must be above £100 and no more than three withdrawals in 12 months. In terms of fixed-rate cash ISAs, United Trust Bank has a one-year bond at 4.78% and this can be opened with a minimum deposit of £5,000.”

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Trading 212, the investing platform, offers an even higher rate of 5.2% on its online Cash ISA which can be opened with £1 and allows unlimited withdrawals. Alternatively, Chip pays 5.1% with no withdrawal restrictions, although you can't transfer in from an existing ISA. Plum’s Cash ISA allows transfers, but you’ll earn a lower rate of 4.29% if transferring from another ISA.

It's worth noting that changes to ISA rules introduced this tax year mean that you can now open multiple ISAs of the same type rather than just one, so you don’t have to restrict yourself to just one provider.


Katie Brain, consumer banking expert at Defaqto said: “An example of how this could be used would be if a person put £5,000 in an instant access ISA as a rainy-day fund, £10,000 in a 1 Year Fixed Rate ISA, and £5,000 in a 2 Year Fixed Rate ISA. This would mean savers can take advantage of the best interest rates for different levels of access required.”