Opinion: Cash ISAs should be savers' first port of call

With generous rates and the ability to shield returns from the taxman, Cash ISAs are now a no-brainer for savers.

There may be hundreds of different savings and investment products out there, but recent news shows it pays not to ignore the humble Cash ISA.

With interest rates at close to their highest level since 2008, savers are finally earning some decent interest on their bank accounts and bonds.

As such, the number of Cash ISAs subscribed to increased by more than 10% in the 2022/2023 tax year, according to recent data from HMRC, with the number of adult ISAs (excluding Lifetime ISAs) subscribed into cash accounts up to 67% (from 64% in 2021/2022), Jason Hollands, managing director of BestInvest by Evelyn Partners, notes.

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Beware the savings tax-grab

But there is one major issue at play that’s often overlooked: tax.

Under the Personal Savings Allowance (PSA), Basic Rate taxpayers can only earn £1,000 in interest on their savings a year tax-free, while Higher Rate taxpayers can earn £500 before incurring tax payments.

Additional Rate taxpayers have no PSA.

More and more savers are being hit by tax payments on standard savings accounts as they go over their tax-free allowance.

The PSA was introduced in 2016 and hasn’t been increased since then, while savings rates have risen sharply.

As such, Basic Rate taxpayers only need around £20,000 in savings and Higher Rate taxpayers around £10,000 to wind up paying tax on their nest egg.

Indeed, HMRC estimates that interest from savings will generate a bumper £10.4 billion in tax receipts this year, an increase from £9.1 billion on last year.

It’s no surprise then that, according to a Freedom of Information request generated by broker AJ Bell, the number of Basic Rate taxpayers liable for tax payments on their savings has nearly doubled to one million, up from just 500,000 last year.

Almost one in 10 Higher Rate taxpayers will now also have to pay tax on their savings, compared to around one in 25 three years ago.

Cash ISAs: use it or lose it

However, Cash ISAs are tax-free and in the current tax year 2024/2025 you can pay £20,000 into one, if you’re 18 and over, while couples can pay £40,000 combined.

It’s a use-it-or-lose-it situation, so if you can, it makes sense to make the most of your tax-free Cash ISA allowance each year.

What’s more, the current rates are pretty generous, for example, Trading 212 currently offers a rate of 5.1% while Chip pays 4.84% on its Cash ISA.

For comparison, the best rate available on traditional savings accounts is 5.2% which you can get on Ulster Bank's Easy Access Online account. However, the bank has already confirmed the rate is falling to 4.75% from next month. 

The next best rate on the market is 5% (from Chip).

The fact you can currently match or even beat the best traditional accounts with an ISA is worth noting as, in the past, rates have generally been lower. 

As Jason Hollands notes, whether you’re a cash saver or an investor, taxation is on the rise, so using the ISA system to shield your money from the taxman is “absolutely vital.”

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