Have you got a flexible cash Isa?
In my view, this is the best type of savings account that you can have and an essential building block for managing your money.
But I imagine there will be many people who read that question and ask: ‘Have I got a what?’
A flexible Isa allows you to take money out and pay it back in without using up part of your annual Isa allowance. The only caveat being that you must replace the cash in the same tax year.
This is a fantastic savings tax-beating feature, which can transform how you use your cash Isa and mean you no longer need to lose a chunk of easy access savings interest to tax.
Taking shelter: Don’t pay tax on your everyday savings – get a flexible Isa to protect them
A flexible Isa is most beneficial for those with large cash pots and the firepower to fill their Isa, but the rest of us too – as they help adjust our financial behaviour.
Most savers have little hope of using our entire £20,000 Isa allowance, but we still tend to put cash that we might dip into in taxed easy access savings accounts.
The limited nature of the Isa allowance tricks our brains into thinking we must protect it and only use cash Isas for money we won’t take out, even if we’d be lucky to use a quarter of it each year.
A flexible cash Isa flips that thinking on its head.
When rates were low, using a bog standard easy access account wasn’t a problem.
Interest was so pitiful that the personal savings allowance offered the protection most people needed against tax on their interest.
But with rates higher and the personal savings allowance stuck at £1,000 for basic rate taxpayers and just £500 for higher rate taxpayers, it’s become much easier to fall into the savings tax trap.
With a savings rate of 5 per cent, a basic rate taxpayer needs just £20,000 in cash now to breach the allowance, while a higher rate taxpayer needs £10,000.
Meanwhile, if you pay 45p tax, you get no personal savings allowance at all.
Yet despite the huge benefits they deliver, flexible Isas haven’t really caught on since they were launched by George Osborne all the way back in 2016.
All banks and building societies could offer the feature as standard, yet flexible cash Isas are relatively thin on the ground.
That’s a great shame.
I’ve been using flexible Isas for a couple of years now for my everyday cash savings and I’m delighted to have dragged my interest out of the tax net.
Before stashing these savings in a flexible Isa, I kept the cash pot I need for dipping into for things like big bills, holidays, car repairs etc, in a standard easy access account.
In a classic piece of mental accounting, at the start of each year I’d move a lump sum into that account and then whittle it down paying for things, before replenishing it again.
Depending on how much I had in cash savings (and due to a house move and renovation this was sometimes quite a bit) I could end up having to pay tax on that interest.
With the money in a flexible cash Isa, I can just forget about that – there’s no tax to pay and no need to go hunting around for information for my tax return either.
I’ve currently got two flexible cash Isas, with Zopa, at 5.08 per cent, and Chip*, at 5.1 per cent.
The reason for having two is that Chip doesn’t accept transfers, whereas Zopa does and I moved some Isa cash there from Nationwide when it slashed my rate.
Having both also gave me a chance to test drive these two app-only accounts and I would happily recommend both. They are FSCS protected, easy to open and you can move money in and out from your bank account seamlessly. If you don’t need to do a transfer, Chip has the slightly better rate.
They are app-based but if you’re reading This is Money, you’re more than capable of running a savings account on your phone. And thanks to new Isa rules you can pay into more than one cash Isa in the same tax year, so can try one alongside another account.
The flexible duo beat all other easy access cash Isas apart from Plum’s* 5.17 [per cent deal – and offer a better rate than every single taxed easy access account.
I’d say that means a flexible cash Isa looks a pretty good deal right now.
*Two of the links above have an asterisk. If you open an account using them This is Money will earn a small affiliate payment. This is part of the revenue that keeps This is Money running for our readers. We do not allow this kind of relationship to affect our editorial independence or influence the deals we like.