You can invest up to £3,600 each tax-year in a cash ISA and if you are a taxpayer, looking for a home for your savings, this should be the first port of call.
The big advantage of cash ISAs is that interest is not taxed and in the current low-interest rate environment this is more attractive than ever.
For example, Barclays' Golden ISA is paying a market-leading rate of 3.61%. Because interest on standard savings accounts is subject to income tax, a higher rate taxpayer would need an account paying 6.01% or more to earn an equivalent annual return, while a basic rate taxpayer would need a rate of at least 4.51% - there simply aren't any standard easy access savings accounts paying rates at these levels at the moment. This is why a cash ISA is a no-brainer.
Choosing a cash ISA
When comparing cash ISAs there are a couple of things you need to bear in mind:
Think about whether or not you need to retain access to your money - if you do, you will need an easy access ISA as most fixed rate accounts penalise you if you make a withdrawal during the fixed term.
Also, if you've got money in cash ISAs that you invested in previous tax years, see what rates they're paying. The rates on many accounts will have fallen significantly in recent months following the Bank of England's interest rate reductions (the base rate has been slashed from 5% to 0.5% since last October), so as well as making use of this year's ISA allowance, it could be worth transferring the money you invested in previous years. Not all ISAs accept transfers though, so you'll need to check this before applying for a new account.
If you don't really understand what ISAs are and how they work, read our article 'How to choose a cash ISA' and watch our video 'Cash ISAs explained'.
What are the leading deals?
Best for this year's allowance only
Barclays' Golden ISA is paying the highest rate at 3.61%. This is an easy access account which allows unlimited withdrawals. However, you can only invest this year's allowance - it does not permit transfers of money invested in previous tax years.
Natwest and Royal Bank of Scotland (which are part of the same banking group) are both offering a Cash Plus ISA, paying 3.51%. RBS customers with a Royalties Gold or Royalties Private account and Natwest customers with an Advantage Gold or Advantage Private account will also receive an additional 0.50% bonus for the first year. As with the Barclays' account however, transfers are not permitted.
Abbey and Alliance & Leicester (which are both owned by Spanish Bank Santander) are each paying 3.50% on their Reward ISA. However, the rate includes a 2% bonus which you only get if you don't make a withdrawal during the first year - you forfeit the bonus if you do need to get at your cash during that time so it's only good value for those who won't need to access their money in the next 12 months. Also, the account is only available for new money.
Other options
The accounts mentioned above don't accept transfers but you don't have to sacrifice your return too much in order to find an account that does allow you to transfer money in from previous tax years, as well as accepting this year's allowance.
Natwest's e-ISA accepts transfers and it pays 3.25% on balances up to £9,999. The rate increases to 3.51% on balances above £10,000. However, you must have a Natwest current or savings account to qualify.
If you've built up more than £30,000 in cash ISAs over the years you could earn 3.20% (fixed for a year) by transferring it to Lloyds TSB's Fixed Rate Cash ISA. However, if you have less than £30,000, the rate isn't as competitive. On balances between £9,000 and £29,999 the rate is 3.0%, which is still attractive, but it's just 1.50% on balances between £3,000 and £8,999.
Alternatively, First Direct's e-ISA and Marks & Spencer Money's Advantage ISA are both paying 3.10% and they accept transfers in. The rate on the First Direct deal is also fixed until the end of April next year, which is another plus point and it permits unlimited withdrawals (this is highly unusual for a fixed rate account as most don't allow withdrawals, or penalise you with a loss of interest if you do take money out during the fixed term).
Click here to see more cash ISA rates.
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