How to find the best cash Isa What is an Isa? Video guide
What is an Isa?
Isas are tax-free savings or investment accounts offered by banks, insurers, asset managers, building societies and National Savings & Investments (NS&I).
There are two main types of Isa - cash Isas and stocks and shares Isas. All interest earned on money held in a cash Isa is tax-free.
If you are a basic or higher-rate taxpayer, the interest you earn on savings will usually be taxed at 20% or 40% - so Best Rate cash Isas will often offer a better return once tax is taken into consideration.
However, this could change when the new Personal Savings Allowance is introduced in April 2016. Basic rate taxpayers will be able to earn interest of up to £1,000 on non-Isa savings without owing any tax (falling to £500 for higher rate taxpayers). Interest earned above these thresholds will still be taxable.
The Which? savings and Isa comparison tables let you search all available savings accounts and Isas from all available providers to choose the best savings rates based on quality of service as well as cost and benefits.
Go further: Which? savings and Isa comparison tables - compare hundreds of deals
What is a cash Isa?
A cash Isa is essentially the same as a traditional savings account, except there are limits on the amount of cash you can transfer in and there is no tax to pay on the interest you earn.
In the 2015/16, you can place £15,240 into a cash Isa.
Isas will shortly become more flexible as savers will be able to take out and put money back into their cash Isa without it counting towards their annual tax-free Isa entitlement for that tax year. This takes effect from 6 April 2016 (although it was originally expected in autumn 2015).
You must consider your individual circumstances before opening a cash Isa to make sure your chosen account is the best one for your needs. There are three principal types of cash Isa, explained below.
Instant access cash Isas
This type of Isa provides savers with the ability to pay in and withdraw money at any time throughout the tax year.
Some let you pay in and withdraw any amount, while others will place annual limits on your withdrawals, or demand minimum deposits from customers.
One thing to remember is that instant access cash Isas often have variable rates of interest – the price you pay for the luxury of moving cash in and out of your account freely.
If interest rates rise, you could see the value of your savings rise, too - but conversely, if interest rates drop, this could negatively affect the return you receive.
Which? Money Compare table: Instant access cash Isas - all available deals compared
Fixed-rate cash Isas
If you’re looking to tie up your savings for a while, you might want to consider a fixed-rate cash Isa. These lock away your money for a set period, usually between one and five years, and in return pay you a higher interest rate. Generally, the longer you tie up your money, the better the interest rate you will receive.
It’s important to note that fixed-rate cash Isas do not allow you to withdraw your money at any time – you forgo the flexibility of easy access to your savings in return for a top rate. So, if you want to access your cash at any point, you may face a penalty, either in the form of a fixed fee or a reduction in your interest rate.
Fixed-rate cash Isas often require a lump sum investment rather than regular savings. If you want to maximise the tax efficiency of your Isa and are able to put a large chunk aside of cash in one go, this is your best option.
Which? Money Compare table: Best fixed-rate cash Isas - compare deals
Regular savings cash Isas
These cash Isas will pay a fixed rate of interest over a set period – usually a year – on the provision that you make a regular monthly savings contribution.
This monthly deposit is limited to your savings allowance within the Isa. In the 2015/16 tax year, you can contribute a maximum of £1,270 per month without exceeding your total limit of £15,240.
Again, it's likely you will not be able to withdraw any of your savings from a regular savings cash ISA, and pay face a penalty if you do so.
Which? Money Compare table - Regular savings cash Isas - compare deals
Help to Buy Isas
This new type of Isa is aimed specifically at would be first-time buyers.
For every £200 contributed, the government will add an extra £50 towards a deposit on your first home, up to a maximum of £3,000.
You can't contribute to a cash Isa in the same tax year as a Help to Buy Isa. Therefore, if you want to open a Help to Buy Isa in the current 2015/2016 tax year, make sure you don't add any money to a cash Isa as well.
Find out more: Help to Buy Isas - our two-minute video explains all you need to know
What is a stocks and shares Isa?
In a stocks and shares Isa, all capital gains and income are protected from tax (although all dividends are still subject to 10% tax).
You can learn more about how these accounts work in our guide titled stocks and shares Isas explained.
Mini and Maxi cash Isas, Toisas and Peps
Isas were originally available as mini Isas (cash only, or stocks and shares only) and maxi Isas (cash and stocks and shares).
TOISA stands for TESSA-only Isa. These accounts were originally created for people who had invested in TESSAs (Tax Exempt Special Savings Accounts) - an older type of tax-free savings vehicle which was phased out of existence when Isas were introduced.
PEP stands for Personal Equity Plan. These were tax-efficient savings products that allowed people to invest in stocks and shares, but new investment in PEPs was stopped in 1999 to coincide with the introduction of Isas.
In April 2008, all of these products were reclassified as either cash or stocks and shares Isas.
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