A stocks and shares ISA is essentially just a normal investing account – with the huge boon that your returns are shielded from the taxman.

Investors therefore usually have nothing to lose by investing in shares within an ISA wrapper. Doing so puts a tax-repelling force field around your portfolio. Any downsides are trivial.

With cash savings, however, it’s a different story.

While a cash ISA is indeed just a tax-free savings account, it’s rare to find one that pays an interest rate as good as the market-leading savings accounts.

In other words, you can’t choose a savings account, and then expect to find the same account available as a cash ISA. For whatever reason, savings providers treat cash ISAs and standard savings accounts differently.

Because of this, deciding to stash your savings in a cash ISA comes at the cost of lower interest.

The Personal Savings Allowance has reduced the appeal of ISAs

While a low interest rate is one reason why savers may be inclined to look past cash ISAs these days, another is the advent of the Personal Savings Allowance.

Introduced in 2016 by then-Chancellor George Osborne, the Personal Savings Allowance means most savers no longer pay tax on savings interest earned through normal savings accounts.

Under the Allowance, basic-rate taxpayers can earn as much as £1,000 in savings interest per year without having to pay any tax on interest. Higher-rate taxpayers can earn up to £500.

Additional-rate taxpayers don’t get an allowance. They should still look to use cash ISAs.

Cash ISAs aren’t quite dead yet though

Despite cash ISA rates often being pale shadows of those on equivalent savings accounts – and the fact that the Personal Savings Allowance gives most of us a straightforward alternative to earning tax-free interest – there are reasons why some people may still wish to opt for a cash ISA.

I’ll run through those reasons in a moment.

But first, let’s look at the different kinds of cash ISAs available – and the best rates right now.

Note: £85,000 FSCS savings protection applies to all of the accounts I’ve listed below.

Easy access cash ISAs

With easy access cash ISAs, you can usually add or withdraw cash as often as you like. Because of this flexibility, easy access is the best ISA type to go for if you’ll need to use your money in the near future.

Interest rates are variable with easy access though, meaning the rate you’re paid can change at any time.

Here are the top easy access ISAs today:

Highest easy access rate available, but withdrawals are limited. If you want to earn the highest interest rate on your cash, you’ll have a stretch the definition of ‘easy access’. That’s because while Paragon Bank pays a decent 1.35% AER variable interest, you only get this rate if you make three or fewer withdrawals per year. More and the rate drops to just 0.25%.
Top rate with unlimited withdrawals. If you want the freedom to make as many withdrawals as you like, try Tesco Bank. It pays a slightly lower 1.32% AER variable.

Fixed rate cash ISAs

With fixed rate cash ISAs, you must lock your money away for a set period. Fixed periods typically last between one and five years.

Generally, the longer the fix, the higher the interest rate you can earn.

Because fixed accounts aren’t as flexible as easy access options, interest rates are often more generous.

Even so, interest rates on fixed rate cash ISAs typically lag those on normal fixed savings accounts.

However there is one huge difference between fixed rate cash ISAs and fixed rate savings accounts: when your money is stashed in a fixed rate cash ISA, you can access your cash before the term ends.

This is NOT the case with fixed savings accounts. There your money is truly locked away for the duration.

The reason you can withdraw cash early from a fixed rate ISA is a rule that requires providers to give ISA savers access to their funds at all times.

That said, if you do withdraw cash early from a fixed cash ISA you can expect to pay an interest penalty. This is usually a percentage of the amount you wish to take out of your account.

Here are the top fixed rate cash ISA deals right now:

Top one-year rate. Virgin Money offers the highest one-year fixed rate cash ISA rate. Its account pays 2.06% AER fixed and matures 24 June 2023. If you withdraw cash early from this account you’ll pay a 60 days’ interest penalty.
Highest three-year rate. If you wish to opt for a longer fix, then Paragon Bank leads the three-year Best Buy tables. Its account pays 2.55% AER fixed. However if you want to access your cash before the term ends, you’ll pay a hefty 270 days’ interest penalty.
Highest five-year rate. Hampshire Trust Bank offers 2.6% AER fixed for five years. Withdraw cash early though, and you’ll pay a 365 days’ interest penalty.

Lifetime ISAs

If you’re aged 18-39, you can open open a Lifetime ISA.

Lifetime ISAs were launched in 2017 with the stated goal of helping more young people to invest.

Here’s a quick overview of how they work:

You can put up to £1,000 per year into a Lifetime ISA.The Government pays a 25% bonus on anything you put in, up to your 50th birthday.You can use Lifetime ISA funds for a deposit towards your first home (as long as you’ve held your account for a year or more) or for retirement once you hit 60. If you wish to access your Lifetime ISA funds early, you have to pay a 25% penalty on the amount you want to take out.You can transfer a Help to Buy ISA into a Lifetime ISA if you choose. Alternatively, you can continue to add funds to your Help to Buy ISA until November 2029.

You can hold a Lifetime ISA in cash or in stocks and shares. But since I’m focusing on cash ISAs in this article, we’ll just look at those.

Here are the best cash Lifetime ISAs available right now.

Highest Lifetime ISA rate, but there’s a monthly fee (and you must have an Apple device). The highest interest rate on Lifetime ISA is available from Nude. It offers savers a decent 1.25% AER variable, though it’s only available to open via its iOS mobile app. This means you’ll need to own an Apple device. Annoyingly, the account charges a £2 monthly fee, so do weigh up the cost.
Highest rate, without a fee. If you’d rather avoid a monthly fee or the need to own an Apple device, then Skipton Building Society offers a Lifetime ISA paying 0.85% AER variable.

When is it worth considering a cash ISA?

While cash ISAs pay lower interest rates, there are still some circumstances where opening one might be the better option.

Consider opening a cash ISA if:

You’re an additional-rate taxpayer. If you earn over £150,000 per year then you don’t get a personal savings allowance. This means you have to pay tax on the interest you earn on your savings. However, this does not apply to cash savings held in an ISA. So if you’re a big earner, opening a cash ISA could be a wise, tax-efficient choice.
You’re likely to exceed your personal savings allowance. If you have lots of savings in cash, you may pay tax on some of your interest. The Personal Savings Allowance is pretty generous for most people, but the income can soon become taxable if you have a few tens of thousands of pounds in cash savings. How soon depends on the total saved and your tax bracket.

For example, if you’re a higher-rate taxpayer (with a £500 allowance), you only need roughly £34,000 in an easy access savings account that’s paying 1.5% to earn enough interest to exceed your allowance. A basic-rate payer could put away just over £66,000 before facing the same problem. In either case, moving some of that money into a cash ISA before you hit the limit could be wise, even if you’ll get a lower interest rate. Do the maths!
You don’t really want to lock away cash. I’ve covered this already. Fixed cash ISAs don’t require you to lock away cash for good. When you put your cash into a fixed ISA, you essentially have a ‘get out of jail free’ card enabling you to access your cash early (though you’ll usually pay an interest penalty).

This is not the case with non-ISA fixed savings accounts. So if you value – or need – the option to access your cash in an emergency but you’re fed up with miserly rates on standard easy access savings accounts, a fixed rate cash ISA could be a smart decision.
You’re a would-be first-time buyer. If you’re under 40, a non-homeowner, and likely to buy your first home in over a year, then you should probably consider opening a Lifetime ISA. No other financial product available offers a 25% bonus like the Lifetime ISA does.

Of course, whether it’s best to open a cash Lifetime ISA or a stocks and shares version is something else to think about.

Don’t forget the annual the ISA allowance

Regardless of the type of cash ISA you go for, be mindful of the annual ISA allowance. This mandates the maximum amount you can put into any type of ISA within a given tax year.

For 2022/23, the ISA allowance is £20,000.

Happy rate hunting!

Have you opened or contributed to a cash ISA this year? Or do you believe that cash ISAs have had their day? I’ve love to read your thoughts in the comments below.

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Cash ISAs no longer pay the best interest rates, but they can still be the right product in certain circumstances
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