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The number of cash ISAs on offer rose to a record high of 611 in April, according to Moneyfacts’ UK Savings Trends Treasury Report, benefiting savers looking to shield their savings from tax.
ISAs have soared in popularity in recent months, with the latest data from the Bank of England revealing that £4.2 billion was deposited in cash ISAs in March alone.
“There will be many consumers expected to pay higher-rate tax at 40% this tax-year, around 2.5 million in fact, according to the Office for Budget Responsibility (OBR), so it’s not too surprising to see such healthy deposits made into cash ISAs,” explained Rachel Springall, finance expert at Moneyfactscompare.co.uk.
Speculation that the Cash ISA allowance could be reduced in this year’s Budget has also boosted cash ISAs popularity, with many savers keen to make the most of the current allowance whilst it’s still available.
Here, we explain how cash ISAs work and why this account can be so useful if you’re looking to keep tax bills to a minimum.
How do Cash ISAs work?
Cash ISAs work in much the same way as standard savings accounts, but the interest you earn is always tax-free. The maximum amount you can pay into a Cash ISA in the current 2025/26 tax year is £20,000, but many cash ISA accounts can be opened with as little as £1.
There are two main types of cash ISAs, easy access accounts and fixed term accounts. An easy access cash ISA usually allows you to make withdrawals whenever you want, although sometimes the number of withdrawals you can make is restricted, so it’s worth checking the small print carefully. If you do plan to dip into their savings pot regularly, make sure you choose a flexible ISA. This means you’ll be able to replace withdrawn funds without it counting towards your annual ISA allowance.
If you don’t need immediate access to your cash, then you may want to consider a fixed term cash ISA instead. As the name suggests, these pay a fixed rate of interest over a set period, during which you usually can’t make any withdrawals.
Fixed term cash ISA rates in particular have risen in recent days, with average returns on a longer-term fixed ISA having increased from 3.95% to 4.01% month on month. Short-term accounts have also improved, with the average one-year fixed rate ISA currently at 4.12%.
You can learn more about different types of cash ISA and how to decide whether this type of account is suitable for you in our article How cash ISAs work.
Who are cash ISAs most useful for?
Cash ISAs are particularly helpful for savers who are not fully covered by the Personal Savings Allowance (PSA), or who may be close to exceeding it.
The PSA allows basic-rate taxpayers to earn up to £1,000 of interest on their savings each year without paying tax. For higher-rate taxpayers, this allowance drops to £500, while additional-rate taxpayers (those earning over £125,140 in 2025/26) receive no allowance at all. This means that anyone in the additional-rate band, or higher-rate earners with significant savings, could face tax charges on the interest they earn from ordinary savings accounts. You can learn more about the PSA in our article What is the Personal Savings Allowance?
Unlike other savings accounts, interest earned within a cash ISA is always tax-free, regardless of how much you earn. For those who have large cash savings, or who have already used up their PSA, moving funds into a cash ISA can shield future interest from tax – potentially saving hundreds of pounds annually.
They’re also a useful tool for people whose income may fluctuate – such as the self-employed or those approaching retirement – who might occasionally move between tax bands. In such cases, a cash ISA provides a form of long-term protection from tax.
Finally, for savers seeking simplicity, cash ISAs avoid the need to declare interest on tax returns, which can make things more straightforward – especially for those with multiple accounts.
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