A high-interest ISA can give your savings a helpful tax-free boost. With interest rates rising from record lows, now is the time to make sure that you are getting the highest interest rate possible. If the money in your bank account is not earning interest, then the value of your savings is going down. This is a consequence of inflation, which you can see in the rising prices on supermarket shelves and in energy bills. Inflation weakens the spending power of your money, but interest can help your savings pot to grow and balance things out.
In this article, we explain how to get the best high-interest ISA for you and why it could make a huge difference to your savings.
Why should you get a high-interest ISA?
The higher the interest rate on your ISA, the more money you receive in interest each year. This is your ISA provider essentially paying you for saving money in one of its accounts.
The money you are paid in interest also earns interest the following year, known as compound interest. This means that if you are paid £100 in interest one year, that £100 will go into your ISA and you will earn interest on it the next year. The higher the interest rate, the more money you will have in your account to earn interest on.
Earning interest on your money is also a useful way to combat inflation, which is when your money is ultimately worth less over time. You will have noticed everything from petrol to cornflakes becoming more expensive recently. By building interest through your savings you can increase the amount of money you have to balance out the fact that it will buy you less. If your money does not earn interest, it is effectively decreasing in real terms.
How to compare high-interest ISAs
If you can make your money grow effectively and efficiently, it can have a transformative impact on your finances. A key part of this is making sure that your savings are in the right place. Here are the basic must-haves for the best high-interest ISAs. Make sure the account you have chosen ticks all of these boxes.
How high is the interest rate on ISAs?
This is the biggest factor and almost goes without saying. The higher the interest rate, the more money your ISA will generate. However, the tricky part is making sure your account always has a high interest rate. Only fixed-rate ISAs offer a stable guaranteed return, which means that other ISAs will have a variable interest rate. Many accounts with introductory high interest rates will cut the rate after 12 months. You will need to give your finances a regular check-up and be prepared to transfer your ISA if you are no longer getting a high interest rate.
Is the type of ISA right for you?
There is no use opening a highest interest ISA if it does not fit your saving plans.
Getting the highest interest ISA sometimes means locking your money away for a set period of time. This might suit you perfectly if you are saving for a specific future purchase. However, if you are saving for a rainy day, you will want to be able to access your money at short notice. Withdrawing from a fixed ISA before the end of the term will usually involve fees that could wipe out the benefit of a higher interest rate. In that scenario having an easy-access ISA – even if it does not have the highest interest rate – is going to be more beneficial.
If you are hoping to get significant returns on your money, you may be better off investing in a stocks and shares ISA than saving in a cash ISA. Your money will be at risk, but it may be worth it if you are building a pot of money over a significant period of time.
Are you within the annual ISA limits?
You can only open one cash ISA, one stocks and shares ISA and one innovative finance ISA per tax year. This will affect which ISA option is best for you, as you may face a limited choice.
You can also only deposit £20,000 per tax year across all of your ISAs. The one exception is if your ISA is flexible. In that case you can make additional deposits if you have also made withdrawals. Read more in our article ‘What is a flexible ISA?’. The new tax year starts on 6 April, so from then you can open a new ISA of any type you choose. Your allowance will also be reset. You can learn more about the basics of a cash ISA in our article 'What is a cash ISA?'.
The different types of ISA
Here are the main types of ISA that you should consider using to start building your savings, tax free. Some options will pay interest on your savings, while others will pay a bonus based on how much you put in.
Easy-access or Variable rate cash ISAs
Easy-access means you will have the flexibility to withdraw your money when you need it. The rate of interest you are paid may vary, but you are able to move your money to a different savings account without paying a penalty if the rate falls below a level you are happy with.
Some easy-access ISAs will require you to transfer any withdrawals into a nominated current account, though you can then move the money to wherever you like. You can see the best high-interest options on our ‘Variable ISAs' page.
Fixed-rate cash ISAs
As the name suggests, your rate of interest will remain the same for a fixed length of time. In most cases, the longer your fixed term, the higher the interest rate you are paid. The major downside is that you will likely have to pay a penalty if you withdraw the money before the term ends. This could be a red flag if you are saving to build an emergency fund, as you never know when you might need it. If you are saving up for a specific purchase, such as a holiday or buying a house, a fixed term may suit you. Learn more by reading our dedicated article on ‘Fixed Rate ISAs’.
Halal cash ISA
This type of ISA is slightly different to the others because it does not pay interest. It is a Sharia-compliant savings account, so the money you save cannot earn interest, in line with Islamic finance rules. However, it does pay an Expected Profit Rate (EPR). The EPR is not guaranteed, but it does mean you can earn money through your savings without compromising your religious beliefs.
Find out more about Sharia-compliant banking in our article ‘Are ISAs Halal?’.
Lifetime cash ISA
A lifetime cash ISA – also called a cash LISA – pays a rate of interest just like a standard cash ISA, but also comes with a government bonus of 25%. The bonus applies to all deposits up to the limit of £4,000 per tax year. This means that if you add £4,000 to your cash LISA in a tax year, you will get a £1,000 bonus in addition to the interest.
The LISA is designed to help you save for retirement or get on the housing ladder. This means that you can only use your LISA cash once you reach 60 or to fund a deposit for a first home costing £450,000 or less. Withdrawals to fund any other spending will be hit with a 25% charge. This will wipe out the bonus and some extra money you have saved. A Lifetime cash ISA is considered a separate category of ISA to other cash ISAs, so you can pay into a standard cash ISA and a cash LISA in the same year.
We explain how LISAs work in more detail in our article ‘Lifetime ISAs explained – are they the best way to save?’.
You can also see the best high-interest options on our ‘Cash Lifetime ISAs’ page.
Stocks and Shares ISAs
Rather than earning interest in an ISA, you can choose to invest your money instead via a stocks and shares ISA. You will still get all of the tax-free benefits of a cash ISA, but you may be able to access more significant returns.
However, keep in mind that all investing comes with risk and fees. You may need to pay more to maintain a stocks and shares ISA than a cash ISA, as your provider will likely charge fees. A stocks and shares ISA will not grow by an advertised rate every year like a cash ISA. Instead, you may find that your investment returns go up and down.
If you are comfortable with risk, investing can be a simple and easy way to grow your money. You can find out more about stocks and shares ISAs by reading our article ‘How to set up a stocks and shares ISA – a step-by-step guide’.
How to get an ISA with a high interest rate
The best way to get an ISA with a high-interest rate is to compare ISA accounts online. Providers must advertise the interest rate offered to customers, so you can see how much your savings might earn before committing to opening an account. If you already have an ISA, you can still switch to one with a higher interest rate. This applies even if you have already opened an ISA of that type in the current tax year. You can find out more about ISA transfers by reading our article ‘ISA transfers explained – everything you need to know’.
Transferring your ISA is an important way of making sure you are getting a high interest rate, as many providers will regularly change the interest rate paid on its savings accounts.
Which providers offer the best high interest rate ISAs?
You can see the highest-interest cash ISAs currently available on the market in the UK on our page ‘best savings accounts in the UK’. You can also use this page to compare cash ISAs to other savings options.
Remember that the best ISA for you will depend on the level of access you need to the money you are saving, and when you want to spend it.
Can I get a higher interest rate with a stocks and shares ISA?
Many stocks and shares ISAs may be able to offer you a better return on your money than a cash ISA. Through a stocks and shares ISA, you can invest money in a variety of different ways. This is very different to saving money in a cash ISA as your returns are based on investment performance rather than interest rates. It also carries much more risk, as investments can go up or down in value.
Whether investing through a stocks and shares ISA will suit you will depend on the reason you are looking to build your savings and your appetite to risk. Read our article ‘Best and cheapest investment ISAs for beginners’ to learn more about getting started.
You could also check out our article on the ‘Top 6 Stocks and Shares ISAs in 2024’ to see what returns are possible.
