Almost 700,000 fewer savers open cash Isas: are Isas still worthwhile?

Savers have begun to shun cash Isas despite their tax-free benefits, with nearly 700,000 fewer accounts opened during the 2017-18 financial year, the latest HMRC data reveals.

This marks the second year in a row that cash Isa subscriptions have fallen dramatically, even as the use of stocks and shares Isas is rising.

So, what's behind the decline - and is there any benefit to taking out a cash Isa today? Which? explores why the number of cash Isas is falling and whether you should still consider the tax-free wrapper.

Cash Isas on the decline

The Isa allowance was £20,000 in the 2017-18 tax year - the same as it is today.

Overall, the number of new cash Isas opened in the 2017-18 tax year fell by 697,000, a 9% decrease.

Just 7.7m savers opted for new accounts, compared with 8.4m the year before.

Indeed, fewer savers have been opening cash Isas every year since 2013-14, when 10.4m were set up - the decline accelerated in 2016-17.

The chart below shows the number of cash Isas opened in the years since.

Find out more: What is an Isa?

Why is the cash Isa less popular?

Cash Isas offer a tax-free wrapper for deposits of up to £20,000 each year - but changes introduced in April 2016 have made that less appealing to many savers.

The 2016-17 tax year is when the personal savings allowance was first introduced.

This lets basic-rate taxpayers earn up to £1,000 in interest each year tax-free. So if your nest egg is more modest, the cash Isa may have lost its shine.

This is especially true as cash Isas are consistently outstripped by savings accounts on rates.

For example, the best rate for a one-year fixed rate bond account is Bank of London & Middle East at 2.2% AER. By contrast, the top rate for a one-year fixed rate Isa is from OakNorth Bank at 1.41% AER.

The result? If you're a basic-rate payer, and you're earning less than £1,000 a year on your savings, you're likely to be better off with a normal savings account.

Do higher earners need the cash Isa?

The calculation is slightly different if you're a higher-rate or additional-rate payer.

Higher-rate payers only have a personal savings allowance of £500. Additional-rate payers, meanwhile, have no personal savings allowance at all.

This makes an Isa wrapper more useful for higher-earners, especially if they have significant savings.

That said, many high-earners choose stocks and shares Isas over cash Isas. People earning more than £50,000 a year are more likely to only have a stocks and shares Isa, according to the data - but people earning less are more likely to only have a cash Isa.

Interestingly though, across income groups, most people have more than one type of Isa account.

Find out more:Personal savings allowance and tax on savings interest guide

Growth in stocks and shares Isa

Bucking the trend of its cash cousin, the number of stocks and shares Isas increased in the 2017-18 tax year, with 246,00 new subscribers.

This number has been steadily rising since 2015-16, albeit at a gentle rate.

A stocks and shares Isa lets you put money into a range of different investments. These include unit trusts, open-ended investment companies (Oeics) and investment trusts, as well as government bonds and corporate bonds. You can also buy individual company shares and put them into your Isa.

Any dividend income, capital gains or interest you earn are tax-free. This is in addition to the existing capital gains tax allowance and dividend allowance.

Find out more: What is a stocks and shares Isa?

Who maxes out their Isa allowance?

Only around one in five savers use their Isa allowance to the limit, according to HMRC analysis of stock and shares Isas in the 2016-17 tax year (when the limit was £15,240).

In light of the personal savings allowance, it's perhaps unsurprising that higher-earners are most likely to take full advantage of the Isa wrapper.

Six in ten Isa subscribers earning more than £150,000 used their full allowance, compared with just one in six of those earning less than £29,000.

You can see the full data in our table below, including stats for those who only subscribed to a cash Isa or stocks and shares Isa.

How can I split my Isa allowance?

You can only open and pay into one Isa of each type in each tax year. These include cash Isas, stocks and shares Isas, junior Isas, Help to Buy Isas and Lifetime Isas.

This means that if you have pay into a cash Isa this current tax year, you won't be able to pay into another cash Isa until the 2020-21 tax year - although you could contribute to a different type.

Some Isas set lower limits on the amount you can pay in - for example, £4,000 for a lifetime Isa and £1,200 for a Help to Buy Isa - which comes out of the £20,000 total.

Breaking this rule, or going over your Isa allowance, will result in HMRC reclaiming the extra money earned.

• Find out more:Cash Isa rules and allowances