Cash ISAs have come under the spotlight in recent years, and not always for the right reasons. The rates on offer plummeted particularly sharply after the Personal Savings Allowance (PSA) was introduced in 2016, and even now, rates are typically far lower on cash ISAs than on fixed rate bonds. But there's some light at the end of the tunnel for these tax-free beauties, with the latest data from Moneyfacts.co.uk showing that the average rate has hit its highest level since 2016!
The average cash ISA rate now stands at 1.29%, up from 0.02% in the last week and the highest it's been since March 2016, when it stood at 1.32%. It marks a sharp rise from October 2017, too, with the average standing at just 0.99% a year ago, and is an even bigger rise from the low point of 0.82% recorded at the start of 2017.
"ISA savers are finally getting some positive news with the average rate reaching well over a two-year high," commented Charlotte Nelson, finance expert at Moneyfacts.co.uk. "It seems that the ISA market has started to reach a turning point."
The figures highlighted are just averages, too. The top-paying variable rate ISA
currently available (from Charter Savings Bank) boasts a rate of 1.40% if you're willing to give 95-days' notice to access your funds, or you can get a rate of 1.37% from Paragon Bank if you want an instant access deal. Or, if you're willing to lock your money away, Furness Building Society and United Trust Bank both offer a rate of 2.20% for a five-year ISA, or for a shorter-term deal, there's Bank of Cyprus UK with its two-year ISA paying a market-leading 1.82%, the top rate for its term.
Want an easy access ISA from a well-known mutual? This account from Leeds Building Society pays a rate of 1.36%, just below the market-leader for its terms
These market-leading rates are the result of plenty of activity in the cash ISA market of late, with several providers having upped their rates in recent weeks – including those mentioned above. Such activity is unusual for the time of year, too, with substantial ISA updates typically being confined to traditional ISA season (which is usually around March-April), so the latest pattern perhaps highlights providers' growing willingness to compete in this area, alongside savers' desire to get more from their tax-free savings.
While it's true that the PSA means the vast majority of savers no longer pay savings tax, there's no telling how long this pattern will be maintained for, and some people may still fall foul of the allowance.
The Personal Savings Allowance means basic rate taxpayers can earn up to £1,000 in interest each year without paying tax on it, regardless of where it's saved – but this doesn't mean that ISAs should be completely overlooked. For one thing, the tax-free allowance falls to £500 for higher rate taxpayers, and additional rate taxpayers don't get any, so some savers may still need to look elsewhere to maximise their tax-efficiency.
Then there's the fact that ISAs remain tax-free regardless of how much is saved, so if you add to your pot each year and build up a hefty sum, you need never worry about breaching your allowance. And what about if savings rates continue to rise? You may need a lot saved to hit the £1,000 limit at present, but if rates were substantially higher, even a small savings pot could breach it, making ISAs all the more important.
Charlotte explains: "With future base rate rises a continuing possibility, it is important that savers think about using their ISA allowance. As rates rise, some savers may find that they could start paying tax on interest earnt on their non-ISA accounts. If savers do not opt to use their tax-free allowance, they might lose tax advantages for when they may need it in the future."