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


Updated on 29 January 2025 | 0 Comments

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

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

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.

With the end of the tax year less than three months away, that means you could shield a whopping £80,000 from the taxman by the time the weather starts picking up. 

What’s more, the best Cash ISAs currently offer more generous rates than their taxable equivalents.

Trading 212 currently offers a rate of 5.12% on its access ISA while Moneybox pays 5.11%.

However, the best rate available on traditional access savings accounts - from Chase - pays 5% while the next best is 4.85% from Chip.

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

All of which makes this a particularly appealing time to shift your savings into a tax-free wrapper.

Maxed out your ISA allowance? Here are more ways to shield your savings from the taxman

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