The comeback of the Cash ISA – why it’s still thriving

The introduction of the personal savings allowance in 2016 dealt a nasty blow to Cash ISAs, and rock bottom interest rates ever since haven’t helped. But they’re back on their feet, and in many ways are stronger than ever.

The Cash ISA challenges

There were concerns about the future of the Cash ISA when the personal savings allowance was introduced six years ago – the number of Cash ISAs being opened fell by 1.6 million that year. Even by 2019/20, the number being paid into still hadn’t recovered to the level we saw before the allowance arrived.

The allowance means basic rate taxpayers can earn £1,000 on savings without paying interest, and higher-rate taxpayers can make £500 (additional rate payers don’t have an allowance).

It’s one reason why when we asked investors without a Cash ISA why they didn’t have one, one in six (16%) said they weren’t interested because their savings weren’t taxed anyway*.

*Opinium survey for HL, December 2021, 341 participants.

And it’s not just the tax situation. Cash ISAs have also had to wade through a dark decade for savers, after the Bank of England base rate was cut below 1% in March 2009, and hasn’t been above it since.

There are savers in their 30s who haven’t known the bank rate above 1% in their adult life. We also asked investors without a Cash ISA why they didn’t have one, almost half (48%) said rates were too low to bother with.

They also face tough comparisons with savings accounts. One in seven people who didn’t opt for a Cash ISA said they put their money into savings accounts instead, because they got a better rate.

In recent months, the big banks have done very little to remedy this. They’ve been even more reluctant to pass on rate rises to their ISAs than they have their savings accounts. In fact, the average instant access ISA is stuck at 0.26% in February – the same as December 2021. The average notice ISA, where you’d need to give notice before a withdrawal, has stayed at 0.37%.

On average, Cash ISA rates are higher than savings accounts. That’s because savings accounts are pulled down by a large number of miserable 0.01% instant access accounts from the high street giants. However, the best rates are still less than you can get in the most competitive savings accounts.

The Cash ISA comeback

Through all these challenges, the total held in Cash ISAs has continued to climb. In 2019/20 it hit £313.49 billion. That year, three out of four ISAs paid into were Cash ISAs. And the reason it continues to thrive comes down to the certainty it offers.

The most common reason people gave us for having a Cash ISA (given by two thirds of people) was the confidence that they would never pay tax on their savings**. Savings accounts simply can’t offer you the same rock-solid guarantee, because there are too many things that can change.

**Opinium survey for HL, December 2021, 170 participants.

Savers know that rates won’t be this low forever. Rates could be set to rise through 2022, and while banks remain reluctant to pass rates on while they have plenty of cheap cash, this won’t always be the case.

When rates rise, your savings will return more interest, and you could breach the threshold. They’re also well aware that their savings are likely to build. Right now, they might not have a sizeable enough sum to make breaching the threshold likely. But over the years, it could come within reach.

Your own situation could change too, because with any luck, you could move up a tax bracket. Over the years, a basic rate taxpayer could move into the higher or additional rate brackets. At this point your personal savings allowance could halve – or disappear – overnight, so you could find yourself paying tax on your interest out of the blue.

And there are no guarantees that the government won’t make tweaks to the tax treatment of savings. We can’t be certain the personal savings allowance will be around forever, or that it will stay at this level. We know the government is currently trying to claw back as much cash as possible after record pandemic spending. To help with that it’ll be considering every possible way to raise money. It’s not written in stone that the personal savings allowance will survive unscathed.

Likewise, you might be planning to build up savings in an account paying higher interest, and then switch into an ISA if tax ever becomes an issue. But doing it this way means you could be vulnerable to any changes in ISA rules.

You can’t be certain that the ISA allowance will be generous enough to cover all your savings when you decide the time has come to switch.

It means there’s still an enormous amount of life in the Cash ISA, and great reasons to consider whether there ought to be a Cash ISA in your life.

The Active Savings platform was built with savers in mind.

With the HL Cash ISA, you’ll hold your Cash ISA with HL***, but choose Cash ISA savings products from individual banks and building societies through your online account.

***You can’t currently access the HL Cash ISA through the HL App. You can’t transfer other ISAs into the HL Cash ISA yet.

More on the Cash ISA

This website is issued by Hargreaves Lansdown Asset Management Limited (company number 1896481), which is authorised and regulated by the Financial Conduct Authority with firm reference 115248.

The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised and regulated by the Financial Conduct Authority (firm reference number 915119). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money.

Hargreaves Lansdown Asset Management Limited and Hargreaves Lansdown Savings Limited are subsidiaries of Hargreaves Lansdown plc (company number 2122142).