ISAs are one of the best accounts for you to have if you are based in the UK. They allow you to save and invest up to £20,000 tax-free each tax year (6 April – 5 April).

However, at the time of writing the best paying Cash ISA in the UK is with Marcus by Goldman Sachs. This account is paying a whopping 1.0% in bank interest annually.

Considering that bank interest rates were as low as 0.1% over the past few years, this seems quite generous, but it isn’t worth wasting an ISA allowance on.

The reason I say this is because everyone in the UK has access to a tax-free savings allowance. This is how much bank interest you can earn before you must start paying tax, and for the 2022/23 tax year these rates are as follows:

Basic Rate Taxpayer - £1,000

Higher Rate Taxpayer - £500

Additional Rate Taxpayer - £0

What’s more, if your income is below £17,570, you may be eligible for a £5,000 “starter” rate meaning you can earn up to £5,000 in bank interest tax-free.

From looking at these rates, the only people who may benefit from Cash ISAs are the mega-wealthy who are in the additional rate bracket (earning over £150,000 per tax year).

But why are they “trash”?

So there are many great benefits to using Cash ISAs, however, these only really show themselves where you are earning anything above the tax-free allowances in bank interest.

Considering that you can only pay up to £20,000 per tax year into your total ISA pots, this means that you would need the following amounts squirrelled away before all your bank interest being tax-free is worthwhile:

Basic Rate Taxpayer - £100,000 (1% = £1,000)

Higher Rate Taxpayer - £50,000 (1% = £500)

Additional Rate Taxpayer – Any amount

That is a lot of money to have saved into a cash savings account just do benefit from it.

Of course, if you are an additional rate taxpayer then this way of saving money is beneficial as it will save you tax at 45% on any bank interest.

However, there are many better ISAs out there for you to be putting your hard-earned money into.

Personally, I think that everyone in the UK should open a Stocks & Shares ISA, even if they only pay £5 a month. This is because historically the stock market has returned an average annual rate of 9.2% which is considerably higher than the 1% being offered for Cash ISAs.

This is the best way to build wealth over the long term and is a proven way to set yourself up for a healthy retirement.

However, you can have multiple different types of ISAs in the tax year, provided you do not pay more than £20,000 across the whole tax year.

You can have the following accounts:

- Cash ISA

- Stocks & Shares ISA

- Lifetime ISA (either Cash or Stocks & Shares)

- Innovative Finance ISA

The other account that all first-time buyers in the UK should consider is the Lifetime ISA. This account allows you to earn up to £1,000 in bonuses from the Government every tax year provided you lock away up to £4,000 to buy your first home!

The way that I split my ISA allowance currently is as follows:

- Lifetime ISA (S&S) – Max out

- Stocks & Shares ISA – Pay in as much as possible

- Cash ISA – Emergency fund for any extra cash

If you can’t tell I’m a bit of an ISA nerd, and you can read even more about ISAs here.

In conclusion, I think that Cash ISAs are past their prime and should only be used as a last resort considering that most easy-access savings accounts are paying a higher interest rate!

Thomas,

The Bank Engine