Should you use your cash Isa balance before any other savings account?
- Providers have increased rates for Isa cash accounts
- The best easy access cash Isa pays 4.65%, while the best one-year fix pays 5.82%
- Experts believe these accounts could peak at 4.7% and 5.9%, respectively
The battle for cash Isa savings has intensified in recent days with a spate of tax-free Best Buy plans being introduced.
Moneybox delivered a new, market-leading, easy-to-access cash Isa that pays 4.65 per cent on deposits of £500 or more.
The savings and investment platform subsequently said that thousands of cash Isas were opened and millions of dollars were deposited within 72 hours.
Shawbrook Bank was hot on his heels, increasing the interest rate on its easy cash Isa to 4.56 per cent the next day.
In a cloud: Cash Isa interest rates have seen a rise in both easy access and fixed rate accounts in recent days
In the world of fixed rate cash Isas, Paragon Bank has been busy increasing the interest rate on its one and two year fixed rate contracts to 5.82 per cent, taking them to the top of the best buy rankings.
Cash Isas have been overlooked by many as a savings option because the interest rates they offer tend to lag behind non-tax-free accounts.
According to the website Moneyfacts, the average interest rate for easy access cash Isas is 3.07.
But savers’ appetite for cash has been whetted. The Bank of England’s money and credit report revealed that cash Isas saw their biggest inflows in July at the start of the tax year since they were introduced in 1999.
Savers pumped more than £3bn into Isas in July – the highest July inflows since 2014.
In the first three months of this tax year, savers have piled up more than £9bn in cash Isas.
What’s next for Isa cash rates?
We asked savings experts what the interest rates might be like and whether these accounts are now worth it.
Andrew Hagger, founder of personal finance website MoneyComms, says: “We could see a slight increase in Easy Access ISA rates when the base rate increases on September 21 (for the 15th year in a row), but that is at Far from certain.” The next inflation figures were published the day before.’
“NS&I’s 6.2 per cent interest rate has left the best one-year fixed rate buys out of whack at the moment as no one can compete with it – so we will see some providers turn their attention to the fixed rate ISA market instead. “
James Blower, founder of the website Savings Guru, also assumes that providers will stick to rising interest rates until the next base rate decision.
He says: “Easy access Isa rates have increased and fixed Isa rates are holding steady, but we do not expect any significant further changes until the next decision on base rates approaches.”
“We think fixed rate Isas are probably at their peak now – it could be up a few basis points, but we expect them to fall slightly, if at all.”
“There could be a lot more to come when it comes to easily accessible interest rates – if the base rate rises to 5.5 percent next Thursday and peaks at 5.75 percent, as many financial experts expect, then we could see the easily accessible cash Isas rise to 5%.” cents.
But Andrew Hagger believes there may be more to come for cash Isas and that one-year fixed rate cash Isas could peak at around 5.9 per cent, while easy access cash Isas could peak at 4.75 per cent in the coming weeks could achieve.
However, he doesn’t expect cash Isas prices to fall any time soon.
He said: “Competition in the cash Isa market remains fierce with many savers using tax-free accounts to ease their tax situation after exceeding their personal savings allowance. Therefore, I do not expect interest rates to fall significantly in the next few months.”
The best accounts at a glance
Easily accessible: Santander – 5.2%
One-year fixed rate: NS&I – 6.2%
Two-year fixed rate: Ford Money – 6.05%
Easy Access Cash Isa: Shawbrook – 4.58%
One-year cash Isa: Paragon – 5.82%
Two-year cash Isa: Paragon – 5.82%
The products featured in this article are independently selected by This is Money’s specialist journalists. If you open an account through links with a star, This is Money will receive an affiliate commission. We will not allow this to affect our editorial independence.
What are the benefits of saving in a cash Isa?
One reason savers may look to cash out Isas to protect their savings is that rising interest rates could cause consumers with larger pots to exceed their PSA.
Blower says: “Cash Isas are definitely worth a look for taxpayers now because, with interest rates at their highest in over a decade, the Personal Savings Allowance no longer protects much of savers’ interest from paying tax.”
For this reason, cash Isas can offer much more suitable longer-term tax-free benefits.
The PSA, introduced in 2016, allows basic rate taxpayers to take home up to £1,000 worth of savings interest tax-free each year, while higher rate taxpayers receive £500.
Additional rate payers receive nothing.
Blower explains: “A basic rate taxpayer will pay interest on the best one-year rate at just over £16,000 and £8,000 for higher rate taxpayers.”
“Although interest rates on Isas are lower, they can provide a better return when tax is taken into account as the interest is paid tax-free.”
Read more here: Will you face a tax bill on your savings as interest rates rise?