How to find the best cash Isa Cash Isa alternatives

Stock trade screen, stocks and shares Isa

If you're willing to take a risk, you might choose to invest in a stocks and shares Isa

What if you aren't sure a cash Isa is for you? We explore the pros and cons of other savings mechanisms.

Savings accounts

Standard savings accounts may be the next place to look if you like to save in cash Isas. 

Basic-rate taxpayers can earn the first £1,000 of interest on non-Isa savings tax-free (£500 if you're a higher-rate taxpayer) under the new personal savings allowance

This new tax break doesn’t mean you should ditch Isas - they still protect your savings against tax going forward, providing important protection for when interest rates start to rise. 

However, banks and building societies have stopped automatically deducting tax from savings and will now pay interest gross so it should be easy to compare Isa and non-Isa rates directly. 

Which? Money Compare table: savings accounts and Isas - compare hundreds of deals

Interest-paying current accounts

You can now earn more interest on cash in top-paying current accounts than in variable-rate cash Isas and ordinary savings accounts. Some providers are paying as much as 5% on your money, although they do limit the amount of interest that you can earn by capping the maximum level of savings (typically £1,000 - £3,000).

We've made it easier for you by analysing all nationally-available bank accounts and selecting the best of those that pay a decent level of interest on positive balances. 

Find out more: current accounts paying interest - for the best interest-paying current accounts

Stocks and shares Isas

As well as investing in a cash Isa each year, you could choose to put some of your annual allowance in a stocks and shares Isa. You also have the option of placing your entire allowance in a stocks and shares Isa should you wish to.

This is essentially the same as investing in equities, but you won't have to pay any capital gains tax or income tax on any profits made from your investment. 

Dividends used to have a tax of 10% deducted from them which couldn't be reclaimed but this deduction was scrapped on 6 April 2016. 

Instead, investors receive a £5,000 tax-free allowance and beyond this, dividend tax rates are set at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers.

It's possible to transfer funds from a stocks & shares Isa to a cash Isa, and vice versa. Unlike with cash Isas, you should only invest if you're comfortable with the risk that your investments can go down as well as up in value.

Because it's difficult to compare stocks and shares Isas in the same way as cash Isas, Which? doesn't compile Best Rate tables for this type of investment. 

Find out more: Stocks and shares Isas explained - all you need to know about this type of investment

Premium Bonds

Premium Bonds don't pay any interest in the normal sense, but each bond is entered into a monthly prize draw. You can invest from £100 (or £50 for existing holders by standing order or electronic transfer) to £50,000. 

Every month, National Savings & Investments (NS&I) pays out two £1 million jackpots and other prizes starting from £25 (over 5,000 prizes are worth between £500 and £100,000).

Every £1 invested is allocated a unique Bond number and each of these has a separate and equal chance of winning a prize each month - so the more money Bonds you buy, the better your chances. 

These investments offer the thrill of a flutter without the risk of losing your original stake, but they don't offer a guaranteed return, so it may not make sense to put all your money into them. 

Find out more: Premium Bonds - we answer your frequently-asked questions

Peer-to-peer investing within an Isa wrapper

Peer-to-peer lending platforms offer the opportunity to secure better savings rates than traditional providers, although these higher rates come with added risk.

The idea is to match up savers, who are willing to lend, with borrowers - either individuals or small businesses. Your money is lent out in chunks to a number of borrowers (to spread risk) and then repaid with interest like a loan, typically over three or five years. 

If you're willing to lend to riskier businesses and individuals you will be offered the best rates, but this increases the likelihood that you will struggle to get your money back if any of the borrowers fail to repay. 

A new type of Isa called the innovative finance Isa was introduced for peer-to-peer lending on 6 April 2016.

You can set up your Isa with an individual platform so that any interest paid by borrowers is tax-free, as long as you keep within your annual Isa allowance. 

Peer-to-peer lending websites are regulated by the Financial Conduct Authority but crucially they aren't covered by the Financial Services Compensation Scheme (FSCS), so your savings are not guaranteed to be protected if the website goes bust.

Find out more: Peer-to-peer lending - we review the most popular companies

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Last updated:

April 2016

Updated by:

Chiara Cavaglieri

Which? Limited (registered in England and Wales number 00677665) is an Introducer Appointed Representative of Which? Financial Services Limited (registered in England and Wales number 07239342). Which? Financial Services Limited is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited. Registered office: 2 Marylebone Road, London NW1 4DF.