The annual push to get savers to use up their tax-free allowance has begun early – but there is speculation that the cash Isa could be under threat.
The chancellor, Rachel Reeves, has reportedly been lobbied to ditch the tax breaks on the popular accounts, just as people are piling in their money to take advantage of them.
Now there have been warnings that the good rates will not last for long, and are likely to go down if the Bank of England reduces interest rates in the summer.
Why are cash Isas in the news?
It is now over 25 years since the individual savings account (Isa) was introduced. Since then, the rules around how much you can hold in the tax-efficient wrapper have changed, as have the different types of Isa you can have. But, essentially, it has always been an account where you can earn interest, or other returns, without paying tax on them.
A cash Isa is like a regular savings account – your money is held in a bank, and you are paid interest at either a variable rate, or a fixed rate, depending on which type you choose.
There is a maximum amount you can put into an Isa: in this tax year it is £20,000, and last year’s budget said it would stay at that level until 5 April 2030. All of it can go in a cash Isa – or, for the first time, several cash Isas – or you can hold some in stocks and shares.
At the end of each tax year, the allowance expires and starts again on the first day of the new one in April. Traditionally, there is an “Isa season” in the months before the deadline, as people look to invest their full allocation.
This season has started early after it emerged that the chancellor has been lobbied by firms in the City to scale back, or get rid of, the tax breaks on the accounts.
The speculation has prompted some people to invest their money earlier, according to Sarah Coles from Hargreaves Lansdown.
“Cash Isas are flourishing under pressure. They had a record year in 2024, and now we’re seeing an early start to the cash Isa season. With decent rates and frozen tax thresholds pushing more people into paying tax on their savings, it’s easy to see why,” she says.
“It’s ironic that, at the same time, there has been so much speculation over the future of the cash Isa.”
What are the best deals?
After several years being ignored as a result of low returns, cash Isas have been enjoying a surge of interest recently as they offer similar rates to those on regular savings accounts.
Some had questioned whether it is really worth investing in a cash Isa following the introduction of the personal savings allowance (PSA). This means basic-rate taxpayers don’t pay tax on the first £1,000 of interest earned outside an Isa, and higher-rate taxpayers on the first £500.
But since rates have improved, many more people will find themselves with a tax bill for broaching these limits.
Rachel Springall of financial information firm Moneyfacts explains: “A higher-rate taxpayer will easily breach their £500 allowance if they are earning 5% on £10,000. It would then be little surprise for cash Isa deposits to thrive this year.”
At the time of writing, the best rate available on a variable cash Isa was 5.02% with Moneybox, although it is only available on an app, you do have to maintain a £500 minimum investment, and it is limited to three withdrawals a year.
Coventry Building Society is offering a one-year fixed deal at 4.5%. Hodge Bank has a two-year fixed cash Isa at 4.41% (with a £1,000 minimum investment) and Shawbrook Bank has a three-year deal for 4.42%, according to figures from Moneyfacts.
How long are they set to last?
When the Bank of England dropped the base rate from 4.75% to 4.5% at the beginning of the month, the ripple effect was felt in what the banks offered, with some drops in rates in easy-access and fixed-term accounts, says Coles.
“Tax year end is a competitive time to raise money, so fixed rates may hold up better as banks work hard for your money as we get closer to 5 April.
“However, given wide expectations of another cut around the summer, both the fixed-rate and easy-access markets are likely to trend downwards over time.
“The benefit of fixing now is that there are some really strong rates around, and given that those for easy-access and fixed accounts are likely to be lower later in the year, there’s a chance to lock in those better rates now.”
Andrew Hagger at personal finance website MoneyComms, says that because of competition, some banks have not passed on all of the recent cuts since last summer.
“With base rate being cut by 75 basis points since last August, most easy-access cash Isas are now paying a lower rate when compared with February 2024.
“However, competition amongst some providers has seen some deals only marked down by around 0.5%.”
Carry out a review
Springall says there is billions in current and savings accounts earning no interest and urges people to review their finances so they can get the most value possible.
“Consumers must shake off apathy and act now to review where they have stashed their savings, ensure they beat the eroding impact of inflation and protect them from tax,” she says.
