Savers who are seeking a safe haven for their money may automatically consider a tax-efficient cash ISA, but there are alternative options that might be suitable, depending on your individual circumstances and approach to risk.
At the start of every tax year, you receive a new annual ISA allowance. For both the current 2024/25 tax year and the next 2025/26 tax year this is £20,000. You can put your full allowance into a cash ISA if you wish, or you can split your allowance between other types of ISA. You can learn more about these in our guide Everything you need to know about ISAs.
Here, we look at some of the pros and cons of cash ISAs, as well as five alternatives to cash ISAs that you might want to consider, and how they work.
Savings accounts
Each tax year, you can receive a certain amount of savings interest without having to pay tax on it, known as your Personal Savings Allowance. Basic-rate taxpayers can earn the first £1,000 of savings interest tax-free outside an ISA (£500 if you’re a higher-rate taxpayer) under the Personal Savings Allowance, so you may choose to save in a standard savings account instead of a cash ISA if you’re confident that your returns won’t exceed your allowance. Read more about this in our article What is the Personal Savings Allowance?
However, with savings rates currently competitive despite recent cuts to the Bank of England base rate, you don’t need to have as much money in savings as you previously did to breach your Personal Savings Allowance.
According to Moneyfactscompare.co.uk the top paying instant access savings account pay more than 4.50%, while the highest rate on a one-year fixed rate savings bond is about 4.80%. By comparison, the top one-year fixed rate cash ISA pays 4.52%. Find out more in our guides Best instant access savings accounts, Fixed rate savings bonds explained and Best cash ISA rates.
It’s worth noting that if you’re an additional rate taxpayer, you won’t have a Personal Savings Allowance at all, so ISAs will be a no-brainer if you want to shelter your returns from tax.
Top 5 Easy Access accounts
by Raisin UK
Interest (AER): 4.51%
Interest on £5,000:
+£229
Guarantee:
£85,000
Interest (AER): 4.50%
Interest on £5,000:
+£228
Guarantee:
£85,000
Interest (AER): 4.48%
Interest on £5,000:
+£227
Guarantee:
£85,000
Interest (AER): 4.20%
Interest on £5,000:
+£213
Guarantee:
£85,000
Interest (AER): 4.13%
Interest on £5,000:
+£209
Guarantee:
£85,000
Top-paying current accounts
Some current account providers offer customers access to linked regular savings accounts, which pay more interest on cash than top-paying savings accounts and cash ISAs. They may also pay decent rates of interest on money held in a current account.
However, the amount you can save is usually capped at around £5,000 or less, with monthly payments often restricted to a maximum of £300 or £400. For example, Nationwide is paying 5% on balances up to £1,500, but only for a year. If you’re a regular saver, the Co-operative Banks pays 7% fixed for 12 months if you save between £1 and £250 every month.
You may also pocket hundreds of pounds in the form of a cash switching incentive by moving to a different current account provider. Find out more in our guide What are the best current accounts and switching incentives?
Stocks and shares ISAs
If you’re saving over a long-term period, for example for a minimum of five to 10 years, you may choose to use some or all of your ISA allowance to invest in a stocks and shares ISA, provided you’re comfortable with the risks involved.
Stocks and shares ISAs enable you to invest in a wide range of assets and across many different geographical areas, but the advantage of doing so within an ISA is that you won’t have to pay any capital gains tax or income tax on any profits made from your investments. Read more in our article How do stocks and shares ISAs work?
You receive a tax-free allowance for dividend income earned outside an ISA, but this has recently been reduced. For the 2024/25 tax year, this tax-free allowance is £500, having stood at £1,000 in the preceding tax year. Above this threshold, dividend tax rates are 8.75% for basic-rate taxpayers, 33.75% for higher-rate taxpayers and 39.35% for additional-rate taxpayers.
ISA rules allow you to transfer your stocks and shares ISA to a cash ISA in the future, if you wish, or the other way around. As mentioned, you should only invest if you can accept that the value of your investments can fall as well as rise, so there’s a chance that you could get back less than you put in. You can find more guidance in our articles What is your attitude to risk? and Investing – the basics.
Money market funds
Volatile stock markets and uncertain economic times can be very worrying for investors, especially for those approaching or in retirement who may not have decades to weather market storms. Money market funds can offer a relatively safe choice for your tax-efficient stocks and shares ISA, and could be considered a defensive core to a wider investment portfolio, as they hold a diversified basket of low risk bonds that are due to mature soon, usually within a year. Read more in our article What is a money market fund?
Money market funds can provide valuable peace of mind that you won’t lose all your savings in the event of a stock market crash. If you haven’t yet decided where you want to invest over the longer term, they can provide a useful short-term home for your money too. Alternatively, you may be planning on spending this money within the next few years, and looking for a short-term home for your savings that you can access relatively quickly.
Money market funds have become more competitive in recent years in the rates they pay following several increases in the Bank of England base rate. However, since the Bank started cutting the base rate in August 2024, rates have eased.
Premium bonds
Premium Bonds are offered by NS&I which is backed by the government, meaning they are 100% secure.
You don’t receive standard interest payments on savings held in Premium Bonds. However, you have the chance to win money in monthly prize draws. NS&I pays out two £1m jackpots every month, and offers numerous other prizes starting from £25. There are more than 2,000 prizes up for grabs that are worth between £5,000 and £100,000.
You can save up to a maximum of £50,000 in Premium Bonds, and each £1 you save is given a bond number with a chance of winning a prize. Find out more in our article Are Premium Bonds better than savings accounts? While they don’t offer a guaranteed return on your savings, they pay someone with average luck a prize-fund rate that amounts to around 4.15%. However, the Premium Bond prize rate will fall by 15 basis points from 4.15% to 4% from the January 2025 draw onwards.
There are no guarantees you’ll get this amount though – you could end up winning nothing at all, or you might win big and receive a substantial prize (if you’re very lucky).
A final thought….
You don’t have to restrict yourself to just one type of savings account – if you want to, you can spread your savings across all the options we’ve mentioned above. However, it’s worth thinking carefully about whether you could land yourself with a tax bill when saving or investing outside of ISAs.
Remember too that if you have a substantial amount of savings, it’s worth noting that you will only be covered for £85,000 with a single institution in the event that your savings provider runs into financial difficulties, That means if you have two accounts with the same bank which together hold more than £85,000, you won’t get the full amount back if something goes wrong. Learn more in our guide Are my savings safe?
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