This article is not financial advice. 

As more savers risk being dragged into paying tax on their interest, it’s more important than ever to use a cash Isa.

With savings rates much higher than they were and tax thresholds frozen, more people are breaching their personal savings allowance and losing some of their interest earned to tax.

Victor Trokoudes, chief executive and founder of smart money app Plum, said: ‘Our goal since day one has been to give customers the best tools to maximise their money. It’s brilliant that people can now get decent returns on cash savings.

‘But high interest, coupled with many people moving into a higher tax bracket, means tax on savings is becoming more of an issue.

‘This isn’t right – everyday savers shouldn’t have to lose out on the tax front just because they want their money to be accessible in cash.’

Use an Isa to beat the savings tax trap 

Frozen income tax thresholds make tax on savings even more of an issue, as they drag a record number of people into paying 40 per cent tax. 

For savers there is a double whammy, as the £1,000 tax-free personal savings allowance is slashed to £500 for higher rate taxpayers.

This means that those earning more than £50,270 will lose 40 per cent to tax on any interest of more than £500 per year.

Additional rate taxpayers get no personal savings allowance at all. 

But savings in a cash Isa are protected from tax on interest, meaning that you can keep all of your returns. 

How to make the most of Isas

Isas make it possible to save or invest up to £20,000 each tax year into either savings or stocks and shares while shielding interest, dividends or capital gains from tax. 

Without a cash Isa, savers could see their returns eaten into at a rate of 20 per cent, 40 per cent or even 45 per cent.

Although the base rate was cut to 5 per cent in August, savings rates remain at a high level.

The tax protection offered by an Isa wrapper is important, but so too is seeking out one of the best buy cash Isa rates.

That means looking away from the high street banks, with most of the best deals offered by other providers, including saving and investing apps. 

The top cash Isa deals pay close to 5 per cent, whereas the average easy-access cash Isa is around 3 per cent, according to rates scrutineer Moneyfacts.

Those who hold their cash with a high street bank are likely doing much worse than the average.

The biggest banks have instant access cash Isas offering between 0.5 and 3.9 percent meaning switching could bag some savers up to three times more interest than they are currently getting (as of 29/10/2024).

Tax treatment depends on your personal circumstances and is subject to change. 

Protecting your savings

Savers may be reluctant to out their cash into an account with a provider whose name they are unfamiliar with. After all, there is a key question that all savers should ask themselves before they put money into any account: is my money safe?

The answer to this is making sure you are covered by Financial Services Compensation Scheme (FSCS) deposit protection. 

This is the UK’s official government-backed scheme that helps customers in the event of a bank or financial firm failing.

If a savings provider is covered by the FSCS, it means each individual customer’s savings are protected up to £85,000. In the case of joint accounts, it protects up to £170,000. 

Savers should be aware that some banking brands share licences, and they need to remain below the £85,000 limit across these

Some savings providers use other banks to hold customer’s money, so before putting your savings into an account check where the FSCS protection comes from.

T&Cs and ISA rules apply.