Do you have a flexible cash Isa?
In my opinion, this is the best type of savings account you can have and an essential element for managing your money.
But I imagine there will be a lot of people who read that question and wonder, ‘I have a what?’
A flexible Isa allows you to take money out and pay it back without using any of your annual Isa allowance. The only caveat is that you must replenish the cash in the same fiscal year.
This is a fantastic feature of tax-beating savings, which can transform the way you use your cash Isa and means you no longer need to lose a chunk of interest from easy-access tax savings.
Take 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 reserves and the firepower to fill their Isa, but also for the rest of us 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 we could use into taxable easy-access savings accounts.
The limited nature of the Isa allowance tricks our brain into thinking we should protect it and use cash Isas only for money we won’t withdraw, even if we were lucky to use a quarter of it each year.
Isa, a flexible cash person, turns that idea on its head.
When rates were low, using a standard, easy-access account wasn’t a problem.
Interest was so miserable that the personal savings deduction offered the protection most people needed against taxes 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 has become much easier to fall into the savings tax trap.
At a savings rate of 5 per cent, a basic rate taxpayer now needs just £20,000 in cash to breach the relief, while a higher rate taxpayer needs £10,000.
Meanwhile, if you pay 45p in tax, you don’t get any personal savings allowance.
However, despite the huge benefits they offer, flexible ISAs haven’t really taken off since they were launched by George Osborne in 2016.
All banks and building societies may offer this feature as standard, but Flexible Cash Isas are relatively rare.
It’s a great shame.
I’ve been using Flexible Isas for a couple of years for my everyday cash savings and I’m delighted to have taken my interest out of the tax net.
Before putting these savings away in a flexible Isa, I kept the cash I need for things like big bills, holidays, car repairs etc in an easy-to-access standard account.
In a classic piece of mental accounting, at the beginning of each year I moved a lump sum into that account and then reduced it to pay for things, before replenishing it again.
Depending on how much you had saved in cash (and due to a move and house renovation, this was sometimes quite a lot), you could end up having to pay taxes on that interest.
With the Flexible Cash Isa, I can forget about that – I don’t have to pay taxes or hunt around for information for my tax return.
I currently have two flexible cash Isas, with soupby 5.08 percent, and Chip*with 5.1 percent.
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 reduced my fee.
Having both also gave me the opportunity to try out these two app-only accounts and I would gladly recommend both. They are FSCS protected, easy to open and you can get money in and out of your bank account without any hassle. If you don’t need to make a transfer, Chip has a slightly better rate.
They’re 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 the new Isa rules, you can pay into more than one cash Isa in the same tax year, so you can try one account alongside another.
The flexible duo beat all other easy-access cash Isas, apart from Plum* 5.17 (bid percentage) and offers a better rate than any taxed easy access account.
I’d say that means the Flexible Cash Isa looks like a 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 type of relationship to affect our editorial independence or influence the agreements we like.
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