Is the cash Isa making a comeback?

Savers shunned cash Isas in the 2021-22 financial year, according to the latest figures from HMRC. Their fall from favour was likely down to the pitiful interest rates offered by providers at the time, but the picture looks very different now. 

Savings rates are currently at levels not seen for 14 years, following 13 consecutive Bank of England base rate rises since December 2021. And with almost £12bn invested in Isas in April 2023 – the largest monthly sum on record – are cash Isa accounts back in fashion? 

Which? takes a closer look at what HMRC's annual savings statistics tell us and whether now is a good time to open an Isa.

Cash Isas drop as stocks and shares rise

Cash Isas allow savers to deposit up to £20,000 without being taxed on any interest earned. Their popularity, however, has waned in recent years and just 7.1 million people paid into cash Isa accounts in 2021-22. It's a drop of 920,000 people on the previous year and is the second-lowest number of cash Isa subscribers ever.

People also deposited less money into these accounts; in 2021-22, savers paid £30.9bn into their cash Isas, down from £36.8bn in 2020-21.

By contrast, the number of stocks and shares Isas being opened jumped from 3.5 million in 2020-21 to almost 4 million in 2021-22. The amount paid into them was up £0.3bn to over £34bn. 

• Find out more: how to find the best stocks and shares Isa 

Why did savers shun cash Isas?

HMRC's annual savings statistics for 2021-22 echo those from the previous year, which also showed savers turning their backs on cash Isas in favour of other types of accounts.

One possible reason for cash Isas' drop in popularity is the abysmal rates offered by banks and building societies at the time. In June 2021, the average rate for an instant access cash Isa was 0.22% AER, according to Moneyfacts data, while the average rate for a long-term fixed Isa was only marginally better at 0.66%.

The tax break offered by Isas was also less attractive. At the start of the 2021-22 tax year, the top easy-access cash account paid just 0.5% AER, meaning most savers were miles away from breaching their personal savings allowance (£1,000 for basic-rate taxpayers; £500 for higher rate) and had little reason to worry about paying tax on interest earned.

Savers were therefore more likely to plump for marginally better rates offered by other types of savings account. Even by the end of that tax year, the top easy-access savings rate had only reached 1.5%, so a basic-rate taxpayer would have needed just under £67,000 in savings before they hit their tax-free limit.

• Find out more:personal savings allowance and tax on savings interest 

Are cash Isas back in fashion?

What a difference a year makes – following 13 consecutive Bank of England base rate rises, aimed at bringing down soaring inflation, interest on savings has risen to levels not seen since before the financial crisis of 2008, when rates for some accounts hit more than 7%.

The flip-side of the current savings boom, of course, is that more people are now at risk of paying tax on their interest. You'd now only need to deposit a lump sum of a little over £17,000 in a one-year fixed account paying the current top rate of 5.8% AER before you'd go over the PSA limit after a year. For higher-rate taxpayers, it's just under £9,000. 

It shouldn't therefore come as a shock that many savvy savers rushed to pay money into a cash Isa before and after their tax-free allowance reset on 6 April. A record £11.9bn was paid into cash Isas in April 2023, on top of the £5.8bn paid in during March.

The graph shows how average rates for cash Isa accounts have changed since April 2021 to the end of the last tax year in March 2023.

How do Isa rates compare?

With rates for savings accounts hitting almost 6% AER, does opening an Isa mean sacrificing interest? The table below shows how the top rates for fixed-term and instant-access cash Isas compare. They are ordered by term.

The market-leading rates for cash Isas are lower than other types of personal savings accounts, so you will need to weigh up if a top rate is worth going for over the tax benefits of an Isa, based on the size of your balance.

What will happen to Isa rates?

Anyone planning on fixing their Isa savings might want to wait. 

If the Bank of England raises the base rate again when the Monetary Policy Committee meets on 3 August, it might push savings rates higher. 

There's no guarantee, though, and Which? research has shown that some providers are slow to pass on base rate rises.

• Find out more: how to find the best cash Isa

What are the Isa savings rules?

The Isa allowance for everyone in the UK is the same. The maximum amount you can deposit in this tax year, 2023-24, is £20,000. If you're saving for a child with a Junior Isa, you can deposit up to £9,000. This is unchanged from 2022-23.

The adult Isa allowance can all be used on one account, or split between several – as long as they are different types of Isas. In other words, you can't pay into more than one of the same type of Isa in the same tax year. 

Cash Isas, stocks and shares Isas and Innovative Finance Isas (IFISAs) will all accept the full £20,000, but you can only deposit up to £4,000 into a lifetime Isa, and up to £200 per month into a Help to Buy Isa (closed to new savers). 

If you exceed your allowance, HMRC may tell your provider to remove extra money from your account, and you may be charged tax on the interest the over-subscription earned. 

Despite these restrictions, the benefit of Isas is that the interest your money makes is tax-free, regardless of how much you earn.

• Find out more: Isa rules and allowances