Individual savings accounts (ISAs) provide a valuable opportunity to save tax-free, but make sure you hunt down the best returns you can get.
ISA rates vary widely depending on which account you go for, and whether you want easy access to your savings, or if you are prepared to tie up your money for a set time.
Here, we explain, how to find the best ISA deals and the difference between fixed or variable rates, so you can find the right deal.
How ISA rates differ from other savings rates
With an ISA, the rate shown is the rate you will actually get, as returns from ISAs are completely free of income tax.
With other savings accounts, the new Personal Savings Allowance (PSA), which came into effect on April 6, 2016, means that all basic rate taxpayers can now earn £1,000 of savings interest a year without having to pay any tax on it. You’re a basic rate taxpayer in the 2016-17 tax year if your income is less than £43,000).
If you’re a higher rate taxpayer, paying tax at the 40% rate on an income between £43,001 and £150,000, you’re entitled to a lower PSA of £500 a year.
If you’re an additional taxpayer earning £150,001 or more, you won’t get an allowance at all.
"Remember that if you are transferring your cash to an alternative ISA, never just cash in your existing account, as you will lose the tax-free benefits..."
Fixed or variable ISA rates?
Some ISAs, usually easy access accounts, pay a variable rate of interest, which means the rate can change over time. You should be prepared to move your money if your rate drops and your account no longer looks competitive.
Remember that if you are transferring your cash to an alternative ISA, never just cash in your existing account, as you will lose any tax-free benefits.
Fixed rate ISAs work in a similar way to fixed rate bonds, in that you agree to tie up your cash for a set period. During this time you will earn a fixed rate of return. This can be useful if you’re saving towards a particular goal, such as a house deposit, but remember that you won’t usually be able to access your savings during the fixed rate period. Generally, fixed rate ISAs pay higher rates of interest than variable rate ISAs in return for you locking away your savings with the provider.
Remember that if you choose a longer term fixed rate ISA, although returns might look comparatively decent now, once interest rates start to rise, better returns may become available.
How can I find the best ISA rates?
When choosing an ISA, you need to think about how you plan to use your savings. Are you likely to need to dip into your cash regularly? If the answer is yes, an easy access ISA is the best option. Or, perhaps you can afford to leave your money untouched for a year or more? If this is the case you might want to opt for a fixed rate ISA which pays a higher return.
Once you’ve worked out which account to go for, you can compare the ISA rates using MoneySuperMarket’s ISA channel.
Do ISA rates change with every tax year?
No, the start of a new tax year does not mean that your ISA rate will change. If you have a savings in a variable rate ISA, your rate could change at any time of the year.
If you have money in a fixed rate ISA, the rate will remain the same throughout the term of the account. All the start of a new tax year means is that you'll have a fresh new ISA allowance to invest.
This tax year, for example (which ends on April 5, 2017), you can invest up to £15,240. The full amount can be invested in cash or stocks and shares ISA or innovative finance ISA or you can split your allowance and put some into each.
Some ISA rates include a short-term bonus which disappears after the first year. If you do opt for one of these accounts, make sure you make a note of when the balance expires, so you can move your money.
What rates will I get from a stocks and shares ISA?
The returns you will receive from a stocks and shares ISA will depend entirely on the performance of the fund or funds you have chosen to invest in. You could end up getting back less than you paid in. You should only consider a stocks and shares ISA if you can invest for five years or more, as this will give you a greater chance of riding out any stock market volatility.