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5 Mar 2021

One month to use your Isa allowance: where can you find the best cash Isa rates?

Have you made the most of your £20,000 tax-free allowance?

Today (5 March) marks one month for anyone who hasn't yet used their £20,000 Isa allowance to make the most of their tax-free savings for the 2020-21 tax year.

It's usually at this time of the year - often dubbed 'Isa season' - that cash Isa providers increase their rates and launch new accounts in a bid to attract those who are looking to deposit their remaining allowance.

However, there's not much of an Isa bonanza this year. According to data from Moneyfacts, average rates continued to fall in March, with the average instant-access cash Isa paying just 0.23% AER, and the average one-year fixed-rate Isa offering 0.38% AER.

Here, Which? reveals where you can find the top cash Isa rates, and explain the tax benefits of keeping your savings in an Isa 'wrapper'.

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What are the best cash Isa rates?

The table below sets out the top rates for fixed-rate and instant-access cash Isas, by order of term.

Account typeAccountAERTerms
Five-year fixed-rate cash IsaGatehouse Bank Five-Year Fixed-Term Green Cash Isa1.15% (EPR*)£1,000 minimum initial deposit
Four-year fixed-rate cash IsaPunjab National Bank Four-Year Fixed-Rate Cash Isa0.95%£1,000 minimum initial deposit
Three-year fixed-rate cash IsaPunjab National Bank Three-Year Fixed-Rate Cash Isa0.85%£1,000 minimum initial deposit
Two-year fixed-rate cash IsaPunjab National Bank Two-Year Fixed-Rate Cash Isa0.8%£1,000 minimum initial deposit
One-year fixed-rate cash IsaPunjab National Bank One-Year Fixed-Rate Cash Isa0.7%£1,000 minimum initial deposit
Instant-access cash IsaAl Rayan Bank Instant-Access Cash Isa0.6% (EPR*)£50 minimum initial deposit

*Expected profit rate.
Source: Moneyfacts. Correct as of 5 March 2021, but rates are subject to change.

While cash Isa rates are usually lower than their savings account equivalents, the top-rate instant-access account here actually beats the top-rate instant-access savings account, which only pays 0.5% AER.

However, if you can afford the minimum initial deposit and are willing to lock away your money, a fixed-rate account might fare better if the current downward trend continues, as variable rate accounts may continue to reduce.

The five-year accounts from Gatehouse Bank is one of its green accounts - if you want to find out more about green savings, we recently wrote a dedicated story on the topic.

Note that the accounts from Al Rayan Bank and Gatehouse Bank are Sharia-compliant, meaning they pay an expected profit rate (EPR) rather than an annual equivalent rate (AER). This means the rate is not guaranteed, but we've never heard of an instance in the UK where an Islamic bank has not paid out its advertised rate.

Notice accounts and regular cash Isas

It's sometimes possible to find competitive deals with less common types of accounts.

Notice accounts are a bit of a mix between a fixed-rate and an instant-access account; you can usually make as many withdrawals as you like, but you'll have to wait a certain amount of time for the money to be released (depending on the notice period).

There's a wide range of notice periods available, but the most common are 30, 60 and 90 days - however there are currently no 90-day notice accounts on the market. Here are the top-rate cash Isas for 30 and 60 day notice periods:

  • Tipton & Coseley Building Society, 30 Day Notice Isa: this pays 0.45% AER, and requires a minimum initial deposit of £100.
  • The Melton Mowbray Building Society, 60 Day Notice Cash Isa: this pays 0.5% AER, and you need a minimum initial deposit of £25. Only available to customers living in Leicestershire, Nottinghamshire, Lincolnshire or Rutland, or who have been members with the society for five years or more.

Regular cash Isas usually require deposits to be made every month; failing to make a payment may result in a loss of interest, so you should make sure you're able to stick to the account's terms before you sign up.

The current top-rate regular cash Isa is from Vernon Building Society, which pays up to 1.45% AER for those that follow its terms - and there are quite a few.

You must make a minimum initial deposit of £500, and then pay in between £25-£500 each calendar month (though you can take a break once a year), and you must also make no more than two withdrawals per year. The account is only available for customers who live within a 25-mile radius of Stockport.

How can Isas reduce your tax bill?

The annual Isa allowance is one of many tax-free allowances that can be used to reduce the amount of tax you have to pay.

Unlike the personal allowance, which is automatically applied to your earnings before any income tax is deducted, savers have to take the initiative to use their Isa allowance.

The key about savings held in an Isa is that the cash and any interest remains tax-free - regardless of how much interest your money is earning.

This isn't the case with savings accounts. Savings interest is taxable and, while the personal savings allowance and very low interest rates mean many people don't have to worry about having to pay interest on their savings, it can catch you out if you accumulate a large savings pot, or move into a higher tax band.

While basic-rate taxpayers have a personal savings allowance of £1,000, it's £500 for higher-rate taxpayers, and those who pay the additional-rate of tax don't get a personal savings allowance at all.

But, with Isa savings, you can use your £20,000 allowance year after year to accumulate a healthy savings pot and never have to worry about whether or not it will affect your tax bill.

Don't forget about the Junior cash Isa allowance

It's not just adults who receive Isa allowances; children under the age of 18 can have Junior Isas in their name. There are cash Isas and stocks and shares Junior Isas, and up to £9,000 can be paid into these accounts in the 2020-21 tax year.

From 6 April, the Junior Isa allowance for 2021-22 will remain at £9,000.

In 2019-20 the Junior Isa allowance was just £4,368.

Should I transfer my cash Isa?

You can search through hundreds of savings accounts and cash Isas with Which? Money Compare.

If you find an account you want to open, the rules on whether or not you have to transfer your existing Isa savings will depend on whether or not you've already paid into a cash Isa during this tax year.

You're only allowed to pay into one cash Isa in each tax year, so if you want to take advantage of a better rate elsewhere you must transfer all money that's been paid in during 2020-21 to the new account using an Isa transfer form.

Money that's been paid in during previous tax years doesn't have to be transferred; you can choose whether you'd like to move all or part of it.

If you're consolidating several cash Isas with savings from more than one tax year, just be careful not to exceed £85,000 being held by one financial institution - this is the maximum amount that's by the Financial Services Compensation Scheme (FSCS).

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Money Compare is a trading name of Which? Financial Services Limited.