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Cash Isas: how to choose the best

An Isa helps your cash grow

Jasmine's picks

Personally, I think of my Isa investments as part of my retirement pot, so I tend to put all the money into a stocks and shares Maxi Isa as they give better returns over time. However, if I were to invest in a Mini Cash Isa I would probably go for the Barclays Tax Haven one at 6.25% AER, simply because it's online and easy to set up, and I don't have to give any notice to take out the money. It's a good way ahead of the Icesave Easy Access Isa at 6.10% AER and you only have to start off with a £1 deposit, where you'll need a minimum investment of £1000 to open the Icesave account. Saying this, I've got an Isa with Icesave and I've never had any qualms with it.

Basically, if I can do financial transactions in my pyjamas in front of the computer then I'm happy!

Current best Cash Isa is the Barclays Tax Haven Isa at 6.25% AER, with a minimum deposit of £1 and instant access.

The best online account at the moment is Icesave Easy Access Isa at 6.10% AER.
Remember cash accounts (ie savings accounts) are not the best for long-term investing.

What is a Cash Isa?

Cash Isas are tax-saving products available to any UK resident aged 16 or over. They're basically savings accounts that you don't pay tax on.

Remember, Isas aren't investments in themselves. They’re just "wrappers" that protect your savings from tax. Putting money in a Cash Isa is just the same as putting money in a building society account or online savings account but you "wrap" it in a tax-saving "bag" so that when you get your interest on the money you don't lose any of it in nasty tax payments.

You can put up to £3,600 into a Mini Cash Isa (you can't get Maxi Cash Isas) each financial year (that's 6 April to 5 April). Once you put the money in you can take it out again but once you take it out you can't put it back in the Isa this year or open up another one. You just get one £3,600, and one go. Once the money is in the Isa, though, you can transfer it directly into another Isa with another company if you want to without making any difference to your annual allowance.

Should I get one?

Quite possibly, although think for a moment. These are the reasons why you might not bother to get a Cash Isa this financial year:

You might want to put a full £7,200 into a Maxi Shares ISA. This financial year (until 5 April) you can put up to £7,200 altogether in Isa-wrapped investments either in two Mini ISAs, £3,600 in cash and £4,000 in shares, or in one big Maxi Shares ISA. In the long term, investments in shares will give you much more money. By "long term" we mean at least five years. So if you're planning on using your Isa allowance to invest for your future (and that's a good thing to do) then we suggest you put that money into shares. Of course, if you would like to do a mix of cash and shares then having a Mini Cash Isa and a Mini Shares Isa makes great sense.
You are planning on using extra money to pay off all or part of your mortgage. This is a great idea, too. Paying off chunks of your mortgage means that you will be mortgage-free much earlier than in 25 years time. You will save loads of money (like tens of thousands of pounds) in interest payments and your gains will be tax-free. When you pay money into your mortgage and save on interest you don't get charged any tax on that saving because you are paying off a debt. In that sense, it is similar to putting the money into an Isa.
You have debts to pay off. Unless your debts are at 0% interest or just student loans, there's no point putting money into any sort of savings account, including a Cash Isa, until you have paid them off. The money you make in interest on your savings will be more than wiped out by the interest you are paying on your debts. Pay those off first and then you can start putting your extra cash into savings accounts and other investments.

However, the reasons you should put money into a Cash Isa are:

You can make more money on your savings than you would in an ordinary savings account, as you don't have to pay any tax on the interest.
You can take the money out at any time if you suddenly need it and you know that you will have pretty much the same amount of money you put in, plus a bit of interest. Money in stock market investments can go up and down wildly in the short term and it's possible that they could be down just at the point when you need to access your cash.
You make interest and you have access to your money at any time in case you need it. This is not the case if you over-pay into your mortgage, unless you have an offset or a particular type of flexible mortgage.
If you find the stock market way too scary but you still want to invest some money, a Cash Isa is a pretty decent bet.

How do I get one?

Easy. You get it in the same way that you would set up any ordinary savings account:

Step 1: Choose a bank or building society

Decide which one will give you the best return on your money; taking into consideration the minimum investment required, the notice period you will have to give to withdraw money from the account (if you are planning on doing so), how easy it is to get to the branch or website and naturally, the interest you will receive.

Step 2: Get the relevant documentation

It's probably worth mentioning that depending on the bank or building society, and whether or not you already hold an account with them - you may have to prove your identity to open an account. If you do already hold an account with the bank or building society then it shouldn't be too much of a problem, although they would be well within their rights to ask for your passport, national insurance number and proof of address. For this reason, it might be worth initially visiting the branch in person because sending your passport through the post is never a good idea. If you do decide to send your passport through the post however, we strongly recommend doing so via recorded delivery.

Step 3: Decide what type of account

If you want an online Cash Isa then click on the links we have provided. If you want a postal one or one that can only be taken out over the counter then either write to the Building Society or go to one of their branches and ask to open up a Mini Cash Isa. An online Cash Isa may be easier to pay into, withdraw from and manage, but by making your money only accessible by walking into the branch in person – you’re reducing your chances of dipping into your savings without thinking. You know yourself better than anyone so make an informed decision about how much you trust yourself with the money.

Step 4: Watch your money grow

Once you’ve opened your Isa, you can sit back, relax and watch your money multiply. Although when you withdraw money you can’t deposit the cash into an Isa again (unless you haven’t reached your £3,600 limit yet), you can transfer your cash between Isas, and you can do this an unlimited amount of times. By keeping a reasonably close eye on the best buys for Mini Cash Isas, you can transfer the money as and when you like to take advantage of the top rates for every bank - although bear in mind that some providers may charge a fee if you take out your cash.

Best buy Cash Isas

Best all-round instant access account

Bank or building society: Barclays Tax Haven Isa

Interest rate: 6.25% AER

Notice period: None

Minimum deposit: £1

This rate includes a 1% bonus for 12 months - you should then move your balance to another Isa to get a better rate.

Bank or building society: Icesave Easy Access Isa

Interest rate: 6.10% AER

Notice period: None

Minimum deposit: £1,000

This account is only available online meaning you need a valid email address to open it.

Best for regular long-term saving

Bank or building society: Scarborough BS

Interest rate: 6.05% AER (guaranteed to track Bank of England base rate until 31st March 2010)

Notice period: 30 days

Minimum deposit: £1,000

This is a limited issue account which is available by popping into the branch with a completed application form which you can fill out and print off by clicking here.