Why cash Isas are suddenly a must-have again if you want your savings to grow

Cash Isas have always been a valuable tool for savvy savers. Unlike with other savings accounts, no matter how much money you have in an Isa, you will never have to pay tax on your interest, protecting every last penny from the taxman.

This year, Isas are showing their worth more than ever.

Until recently, they played second fiddle to ordinary savings accounts because they simply did not offer as good rates.

Two years ago, there was a 0.6 percentage point gap between the best ordinary fixed-rate savings account and an equivalent Isa.

By last year, the gap had shrunk, but ordinary accounts were still 0.28 percentage points ahead of Isas.

Today, there is but a whisker between them — as little as 0.05 percentage points. In fact, the gap is now so small that there is little reason not to opt for the tax-free Isa.

That is not the only reason why Isas are more valuable than in previous years. at times such as these, when interest rates are generous — frequently breaching 5 pc — the tax shelter that Isas offer really comes into its own.

Opt for an ordinary savings account and you could land yourself a tax bill if you have more than £20,000 in an account paying 5 pc.

Basic rate taxpayers have a personal savings allowance of £1,000; that means they can earn this amount in interest tax-free. after that, they pay tax on their interest at their income tax rate of 20 pc.

higher rate taxpayers would only need £10,000 in an account paying 5 pc before being hit with a tax bill.

If you pay tax at the additional 45 pc rate, you get no allowance at all and so are charged on every pound of interest you earn.

But not so with Isas. If you want to make sure you don’t pay tax on your savings, I would recommend putting one on the top of your to-do list.

The end of the tax year is looming on april 5, so act now to take advantage of this year’s Isa allowance.

You can save up to £20,000 in an Isa each tax year, but you cannot carry over your allowance — if you don’t use it, you lose it.

These are my top tips to get the most out of your cash Isa.

WATCH OUT FOR SNEAKY T&Cs

PROVIDERS jostle with one another to catch your eye by offering competitive interest rates so that their Isa appears in the best-buy tables.

But sometimes, behind that top headline rate, there lurks some restrictive terms and conditions.

For example, some limit the number of times you can take money out each year. That may not be a problem, but if you do need unlimited withdrawals, make sure you have it.

LOOK FOR FLEXIBILITY

MOST easy-access Isas allow you to take money out, but not put it back in without it counting towards your annual allowance again.

That means, for example, if you had £20,000 in your account and withdrew £ 1,000, then replaced the sum within the same tax year, you would exceed your allowance.

however, some Isas are flexible, which means you can take money out and put it back in again without it counting towards your current year’s allowance.

It basically 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.

Flexible Isas are few and far between among the toppaying accounts.

If you are happy to open an account on your phone through an app, then Zopa and Chip are the flexible ones to go for. Chip pays 5.1 pc and Zopa 5.08 pc.

Online rates are lower with Ford Money at 4.4 pc while, on the high street, swansea Bs offers 4.25 pc.

CHOOSE FIXED OR EASY-ACCESS RATE

FIXED-RATE Isas, where you tie your money up for a certain term

— usually anything between one and five years — are ideal if you have money that you do not want to touch for some time.

Look at what your current providers have to offer as they often give slightly better deals. For example, Virgin Money pays a top 5.25 pc rate which is fixed for a year and available only to its current account holders.

The best rates are a tad over 5 pc for one year. But if interest rates fall, as generally predicted, would you be better off going for a two-year fixed at 4.7 pc?

You might get a lower rate now, but you could end up with more interest over the two years.

Basically, you are betting that one-year rates will be at least 4.4 pc in a year’s time giving you an average of 4.7 pc over the two years.

If you have already opened an Isa this tax year and have not paid in the full £ 20,000, you can top up your easy-access account. Don’t worry too much about the rate right now, as you can transfer it to a better one once the money is in the account.

If you have a fixed-rate Isa, it’s probably too late to top it up. That means you have lost the rest of your cash Isa allowance.

But there is a twist here; you can use the rest of your allowance if your fixedrate Isa is with a handful of providers such as Charter Savings Bank, Kent Reliance, Aldermore, Paragon or Newcastle or Nationwide building societies. They organise their Isas so that you can split your money between easy-access and fixed-rate Isas and it still counts as just one cash Isa.

GET READY FOR THE NEW TAX YEAR IN APRIL

EVEN if you have used up your allowance for this year, you should be looking at what is around when you can use next year’s allowance, starting from April 6.