Beat the taxman with the best cash ISAs

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Best cash ISAs

Even though ISA interest rates are awful at the moment, they’re still a must-have savings option. Below we explain why this is – and how to find the best cash ISA deal.

What are the benefits of cash ISAs?

Cash ISAs are simply tax-free savings accounts.

Cash ISAs are simply tax-free savings accounts

Normally when you put money into a savings account, you hand over 20% of your savings interest to the taxman if you’re a basic-rate taxpayer (40% if you’re a higher-rate taxpayer).

However any money you put into an ISA is 100% tax free.

You can also take money out of a cash ISA whenever you want (unless it’s a notice account).

But is it worth having an ISA at the moment? Aren’t savings rates rubbish?

Yes, interest rates are dire at the moment – the best you can hope for is 1.6% for an instant access ISA, and 3% if you’re willing to lock your cash away for five years.

But because interest rates are so rubbish, it’s even MORE important that you take advantage of your ISA allowance. If you don’t, the taxman will continue to tax your savings, making the current poor rates even more miserable.

Long-term benefits of ISAs

The great thing about ISAs is that all your money stays tax-free year after year.

So if you put away £3,000 into an ISA each year, after five years you’ll have built up £15,000 – all of which will be tax-free (plus the interest you’ve earned, of course).

That’s why it’s still worth saving into an ISA – even when the interest rates are relatively low, as they are now.

Remember that when interest rates go up in the future, you can transfer your ISA nest egg to an ISA account that pays higher interest – while still shielding all your ISA savings from the taxman.

How does the ISA deadline work?

You can only save a certain amount of money into a cash ISA each year.

Every tax year (which runs from 6 April to 5 April) every person aged over 16 in the UK can put up to £5,760 into an ISA.

If you don’t put money in by 5 April, you lose that year’s ISA allowance. You can’t ‘roll over’ your allowance into the next year.  Once the date’s passed, it’s gone forever.

So the deadline for this year’s cash ISA allowance is 5 April 2014.

The deadline for your cash ISA allowance is 5 April

Many cash ISA application deadlines last until 11.59pm on April 4 (if you apply online). Full details below.

The ISAs featured in this article are the top picks at the time of writing.

Top ‘instant access’ cash ISAs

Instant access ISAs are ISAs that you can take your money out of with no notice required.

Interest rate: 1.6% AER

Allows transfers in from previous ISAs? Yes

Access: Online, by post or in branch

Minimum deposit required: £500

To sum up: This is the current best rate of interest for instant access cash ISAs. You can start saving from £500, and this ISA allows you to transfer in money from previous ISAs.

Interest rate: 1.6% AER

Allows transfers in from previous ISAs? No

Access: Online or in branch

Minimum deposit required: £1

To sum up: Matches Santander’s rate of interest, but doesn’t allow you to transfer previous ISAs to this rate. However it only requires a minimum deposit of £1, compared to Santander’s £500. (If you’re an existing Nationwide customer, you can open this ISA online. If you’re not, you need to go into a branch to open an ISA with them).

Interest rate: 1.55% AER

Allows transfers in from previous ISAs? Yes

Access: Online only

Minimum deposit required: £1

To sum up: Second best interest rate, but you can open an account with just £1 and it allows you to transfer in previous ISAs.

Top ‘notice’ cash ISA

You can get a (very) slight higher rate of interest if you’re prepared to give 90 days’ notice before accessing your ISA money.

Interest rate: 1.8% AER

Allows transfers in from previous ISAs? No

Access: Post or in branch

Minimum deposit required: £10

To sum up: Pays the top rate of interest (just), but you can’t access your money without giving 90 days notice (if you withdraw money without giving notice, you get hit with a 90-day interest penalty). It also doesn’t accept transfers in.

Credit Union ISAs

Credit Unions are not-for-profit community organisations that offer savings and loans at very competitive rates of interest to their members.

Some Credit Unions have now started offering ISAs, and they often beat the main banks – offering interest rates of up to 2.7%.

The only catch is, Credit Unions tend to be local, community based organisations – so not everyone has access to them or can join one.

It’s worth investigating though. Find out if there’s a Credit Union near you.

How much money will my ISA interest earn?

This depends on how much you’ve got saved – and obviously the rate of interest.

You can work out how much your savings will earn by using this savings calculator.

Just select the ‘How much will I have?’ option and enter your figures. Remember that ISAs are tax-free, so when your result is calculated, look at the ‘Tax free’ figure provided.

Cash ISA FAQs

Can I withdraw my money at any time?

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As long as you’ve picked an ‘easy access’ ISA, you can withdraw your money whenever you want (just like a normal savings account).

The only thing to remember is once you’ve withdrawn the money, you CAN’T put it back in and receive the ISA tax benefits.

For example: Say you save £5,000 into a Cash ISA. That leaves you with £760 left of your annual cash ISA allowance. You later withdraw all £5,000 – but you would still ONLY put £760 back into your ISA that tax year.

How many ISAs can I have?

You can have lots of different cash ISAs with lots of different providers – but you can only open one cash ISA each tax year (so you can’t open two cash ISAs in one tax year).

Is it easy to transfer money from one ISA to another?

Yes, it’s really easy. You can transfer all your past cash ISAs to a new ISA account (as long as it accepts transfers in).

Just ask the bank or building society who you want to transfer your ISA to for a transfer form. Fill it in and they’ll do the rest.

IMPORTANT: Always use an ISA transfer form to move your money – NEVER withdraw your money from your old ISA to put into your new one, or you’ll lose all the tax benefits and only be able to put one year’s ISA allowance into your new ISA.

Final cash ISA tip

Most cash ISAs are ‘variable rates’, which means that providers can change their interest rate whenever they feel like it. So if your interest rate drops, move!