The Trick That Can Transform Your Cash Isa Into a Flexible Tax-Free Winner
By Simon Lambert for Thisismoney.co.uk
Updated: 23:38 BST, 5 October 2023
What’s the best thing to look for in a cash Isa?
A good savings rate is the obvious answer, but there’s also a lesser-known element you might be missing that could prove very useful in keeping as much as your savings tax-free as possible.
It’s something all Isas could offer, but not that many do, and it’s even more important now rising rates mean more people are losing interest to savings tax on standard accounts.
The feature you should ask about is whether an Isa is flexible.
A flexible Isa is one where you can take money out and pay it back in without it counting as part of your Isa allowance, as long as you replace it in the same tax year.
It transforms your Isa from something you try to avoid taking cash out of – for fear of losing the valuable tax-free protection – to a savings pot that you can dip into when needed.
Flexibility is also a feature that you can get in a stocks and shares Isa, but it is more useful for easy access cash savings than investment pots.
The feature was launched from April 2016 by former Chancellor George Osborne, but has flown somewhat under the radar since.
I think that needs to change, particularly now higher rates and a freeze on income tax thresholds mean more of our hard-won savings interest is being raided by the taxman.
A flexible Isa is most beneficial for those with large cash pots and the financial firepower to fill their Isa each year, but it is also valuable in terms of shifting financial behaviour for those who can’t.
Because while most of us have little hope of using up our entire £20,000 Isa allowance each year, we still tend to put rainy day pots or cash that we might need into standard easy access savings accounts.
When rates were low this didn’t matter so much, as the personal savings allowance protected many from tax on their interest, albeit the £1,000 allowance is halved for higher rate taxpayers and eradicated for additional rate taxpayers.
But now with the best easy access savings accounts paying 5 per cent or more, a basic rate taxpayer with more than £20,000 saved would start losing interest to tax.
Meanwhile, a higher rate taxpayer would face tax on a savings pot of more than £10,000.
We regularly urged readers to get their cash into Isas and not just rely on the personal savings allowance even when rates were low for this very reason.
Savings tax has a chilling effect on the effective rate that you receive, it turns the best easy access savings rate of 5.2 per cent paid by Coventry Building Society into 4.16 per cent for basic rate taxpayers and just 3.12 per cent for higher rate taxpayers.
If you stick your money in Coventry BS’s cash Isa instead, you will get 4.9 per cent with no tax to worry about.
So why aren’t we all sticking as much cash as we can into flexible Isas?
Unfortunately, it’s because Isa flexibility isn’t a feature that has caught on anywhere near as well as it could have done.
A lot of banks and building societies don’t offer it – and even with some that do, the usefulness is nullified somewhat by limits on withdrawals per year before your rate plummets.
Furthermore, to take full advantage, you will also want to be able to transfer old Isas into the pot, and that means choice is narrowed down further.
A run through the top deals in our cash Isa tables reveals quite how hit and miss finding a cash Isa that gets all this right can be.
For example, that Coventry BS Isa mentioned above is flexible, but it limits withdrawals to four per year, otherwise, the rate drops. This is also the case with Virgin Money, which limits withdrawals to three.
Moneybox’s table-topping cash Isa isn’t flexible and has withdrawal limits, while Shawbrook, Charter Savings Bank, Oaknorth, and Cynergy all challenge at the top of the table and have no withdrawal limits but their Isas aren’t flexible.
Out of the eight best cash Isas in our tables, the only one I can find that fits the bill of being flexible, having no withdrawal limits, and accepting transfers is Skipton’s Bonus Cash Isa, which pays a healthy 4.9 per cent.
The catch is that 1 per cent of that rate is a bonus that drops off after a year. At which point, you’ll need to either hope Skipton offers another top deal with all those features, or go looking for the flexible Isa needle in the haystack again.
In the meantime, let’s hope more banks and building societies start offering flexible Isas and deals that don’t limit withdrawals.
It would certainly help them stand out from the crowd – and we will soon be highlighting those that are flexible in our tables.
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