Martin Lewis has drawn up three questions Britons should ask themselves before opening a cash ISA.
A cash ISA is a savings account you never pay tax on, and people 16 or older can put up to £20,000 into one in the 2022/23 tax year, which ends on 5 April.
As with other savings accounts, there are different types of cash ISAs, such as easy access (which allows you to withdraw money whenever you want) and fixed rate (where a guaranteed rate is set and the money is kept for an allotted amount of time).
But, due to the personal savings allowance, few people with savings accounts pay tax on interest, as all basic 20 per cent rate taxpayers can earn up to £1,000 interest in savings before being taxed.
According to MoneySaving Expert, fewer than one in 20 people get close to that, and so for everyone else there is no practical benefit to opening a cash ISA.
On Tuesday’s episode ofThe Martin Lewis Money Show, Mr Lewis argued that is the interest rate that counts, adding that cash ISAs usually pay less than normal savings.
But he also raised several caveats, and urged people considering opening or keeping a cash ISA to ask themselves the following three questions:
- Are you already paying tax on savings interest? If that is the case, Mr Lewis says opening a cash ISA rather than saving in normal savings is a “no brainer”
- Are you near the limit where you will earn enough interest to pay tax on interest? If yes, he advises that putting money in cash ISAs now could protect you from future tax.
- Are you happy to lock your money away but may also need to access it? Unlike normal savings accounts, fixed cash ISAs must let you withdraw money (though Mr Lewis warns this carries a significant interest penalty).
Elsewhere in the show, Mr Lewis named the top cash ISAs currently on offer for those seeking to open one.
He named Cynergy Bank as offering the highest rate for non-flexible, easy-access ISAs at 2.85 per cent. For a flexible account, he said Yorkshire BS pays a slightly lower 2.75 per cent rate.
Mr Lewis also identified Barclays as currently paying the top one-year fixed rate at 4 per cent. For an online account all can open, he said Virgin Money pays 3.79 per cent.
