The best cash Isas to start saving for the 2020-21 tax year

The start of the new 2020-21 tax year began on 6 April, which means everyone in the UK has a renewed tax-free £20,000 Isa allowance.

This allowance is the total amount you can collectively pay into your Isa accounts between now and 5 April 2021, and you won't have to declare or pay tax on the interest your cash earns.

But, with savings rates as a whole on the decline, and other tricky rules and regulations you have to stick to, it can be hard to know where to start.

Here, Which? reveals the cash Isas with the top rates, how to transfer your Isa savings and how to stay on the right side of the Isa rules.

The best cash Isa rates for 2020-21

The table below shows the top rate accounts for fixed-term Isas, which don't require savers to hold another account with the provider.

_{Source: Moneyfacts. Correct as of 7 April 2020, but rates are subject to change.}

As these top rates show, the longer you lock your money away for, the higher the interest rate you'll receive.

However, none of these rates can match or beat February's CPI inflation, which measured 1.7%. If your savings fail to grow at the same rate of inflation, your cash will lose value in real terms.

That being said, Shawbrook Bank's five-year fix isn't far off - but, before you commit, you'll need to be sure that you won't need the cash being saved until the five years is over. Also bear in mind that savings rates could improve before the end of the term, and you won't be able to take advantage of them.

Also note that all of the accounts, bar Bath Building Society's instant-access Isa, require a minimum initial deposit of at least £1,000 - this is the amount you need to save just to open the account. While there are accounts that will accept lower amounts, they don't offer the top rate.

Notice cash Isas

While fixed-term and instant-access accounts are the most popular account types, it's sometimes possible to find competitive rates with notice accounts and regular savings accounts.

Notice accounts are similar to instant-access, in that you're usually allowed an unlimited number of withdrawals. The only catch is that you must give a certain number of days' notice until the provider will pay out your requested cash.

Typically notice account periods last for 30, 60 or 90 days; the top rates for each of these are:

• Aldermore 30 Day Notice Cash Isa: 1.3% AER, £1,000 minimum initial deposit
• Kent Reliance 60 Day Notice Cash Isa: 1.2% AER, £1,000 minimum initial deposit
• Bank and Clients 90 Day Cash Isa: 1.25% AER, £1,000 minimum initial deposit

Note that the top rate here is offered by a 30-day notice account - usually, the longer the notice period the higher the interest.

Again, these top-rate accounts may be unattainable for those with smaller savings pots, as they all require an initial deposit of £1,000.

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

Why it's a good idea to use your Isa allowance now

While many providers ramp up their Isa options in February and March, with an aim to lure any savers who haven't yet used up their Isa allowance, it doesn't really pay to leave your Isa saving to the end of the tax year.

Using your allowance early doors has several benefits:

1. Rates are set to drop further

To ease financial pressure caused by the coronavirus crisis, the Bank of England reduced the base rate to a record low of just 0.1%.

This is the rate banks are charged for taking out loans, and it's generally passed on by reducing rates on mortgage repayments and savings. Many top rates have already been withdrawn and reduced, and we expect that trend to continue.

The only way to avoid an even lower rate is to lock into a fixed-term account now; variable rates can change at any time.

2. You can save on your tax bill

Those with higher wages and a large savings pot could get caught out if their savings interest exceeds their personal savings allowance. This is £1,000 for basic-rate taxpayers; £500 for higher-rate taxpayers; additional-rate taxpayers don't receive this allowance.

You'd have to declare savings interest earned during 2020-21 on a self-assessment tax return, and the added income could even tip you into a higher tax band. But there are none of these problems if you save into a cash Isa before your savings have earned any interest this tax year.

3. Your cash will have several months of extra growth

The sooner your cash starts earning interest, the better. Depending on how much you've got saved and the rate you're earning, the effect of compound interest can see your savings pot grow significantly in just a few months - something you'd miss out on if you don't start saving now.

Can I pay into more than one cash Isa?

If you've been super-speedy and have already paid into a cash Isa in the current tax year, the bad news is you won't be able to open and pay into another cash Isa.

It's still possible to take advantage of another Isa during this tax year, but only if you transfer all of this year's deposits into it.

This also counts if you've paid any money into an existing cash Isa since 6 April. In this case, you'd only have to transfer the money that's been deposited during this cash year. Money paid in during previous tax years can either stay put, or be transferred at the same time.

It may not be possible to do this if you've signed up for a fixed account; some don't allow early withdrawals, while others will deduct interest as a penalty, so you should make sure it's definitely worth taking out your cash early.

• Find out more:how to transfer your cash Isa

How much money can I pay in?

The £20,000 Isa allowance is the total amount you can pay into Isas between now and 5 April 2021.

You can pay the full £20,000 into either a cash Isa, stocks and shares Isa or an innovative finance Isa.

Or, you can split the allowance between several different types of Isas. This can be split any way you like into the main Isa types.

However, if you have a lifetime Isa you can only deposit a maximum of £4,000 in any one tax year. While there are cash and stocks and shares lifetime Isas, lifetime Isas are considered a separate Isa entity. This means you can pay into a lifetime Isa, as well as a separate cash Isa and a stocks and Isa, if you wish to.

Help to Buy Isas, which are now closed to new customers, only accept payments of £200 per month. What's more, a Help to Buy Isa counts as a cash Isa, so if you make deposits into a Help to Buy Isa this year, you won't be able to open or pay into an alternative cash Isa.

• Find out more:cash Isa rules and allowances

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