Savers piled up £11.7bn in cash Isas in April, the biggest month for tax-free accounts in 25 years.

Cash Isas have seen the biggest inflows at the start of the tax year since tax-free accounts were launched in 1999, official data shows.

Savers funneled a record £11.7bn into cash Isas in April, latest figures from the Bank of England reveal.

It’s more than the first three months of the 2023-24 financial year combined, when savers stockpiled more than £9bn in cash Isas.

What is behind Isa’s fever?

Experts attribute two factors to April’s Cash Isa boom: high savings rates in regular accounts mean deposits of £20,000 are likely to breach the personal savings allowance and also high cash savings rates are attracting the savers.

Over the past year, savers have experienced some of the highest savings rates in 15 years.

But it means millions of savers will now have to pay taxes on the interest their savings have accumulated, potentially for the first time in history.

This is because high interest rates on savings accounts will have caused many savers to default on their Personal Savings Allowance (PSA).

The PSA means basic rate taxpayers pay no tax on the first £1,000 of interest earned each year, while higher rate taxpayers have a £500 allowance. Additional rate taxpayers do not receive a PSA.

Rachel Springall, finance expert at Moneyfacts Compare, said: ‘As interest rates rose sharply last year, those savers who decided to invest their cash outside of an Isa wrapper may have defaulted on their PSA.

‘Cash Isas may be a better option, particularly for higher rate taxpayers with big savings.

‘The long-term tax-free wrapper is the benefit of a cash Isa, which protects returns regardless of interest rate increases.

“Despite its introduction in April 2016, PSA limits have not been increased and interest rates are much higher.”

When the PSA was introduced, the best one-year fixed rate bond on the market paid 1.91 per cent, so a basic rate taxpayer would have defaulted on the £1,000 PSA with a deposit of £52,357.

Today, the best one-year bond pays 5.21 per cent, so a basic rate taxpayer would default on the allowance by £19,194.

Similarly, the best easy access account available in April 2016 paid just 1.45 per cent, so the PSA base rate would have been breached with a deposit of around £69,000.

Now that the highest rates pay around 5 per cent, £20,000 would generate £1,000 in interest.

Mark Hicks, director of Active Savings at Hargreaves Lansdown, added: “At a time when income tax thresholds have been frozen and savings hit 5 per cent, anyone with savings of £20,000 faces a potential tax bill, which has pushed Cash Isas up the agenda for millions of savers and brought a bonanza to Isa season.’

There are also better cash Isa rates on offer than this time last year.

Savers can find easy-to-access cash Isas paying up to 5.2 per cent, while the best one-year fixed rate Isa pays 4.78 and the best two-year solution offers 4.63 per cent.

Rachel Springall adds: ‘There has been a flurry of activity among Isa providers, launching and raising Isa rates to attract deposits.

“Those who have not yet opened a new Isa for this tax year will find that a couple of providers have increased the rates on their one-year fixed rate cash Isas, with Virgin Money holding firm in first place, which pays the 5.05 percent.” .

Meanwhile, savers paid £8.4bn to banks and building societies in April, the highest figure since September 2022.

As well as cash Isas, savers paid £600m into fixed rate accounts and £400m into easy access accounts. Meanwhile, savers withdrew £1.4 billion from interest-free accounts.

Hicks said: ‘Recent weeks have seen further movement in the yield curve, so while easy access rates have been reduced, there are still some really attractive rates in the fixed rate market, particularly in shorter deadlines.

“If you don’t need the money straight away, it’s worth considering a solution and checking with smaller banks and cash savings platforms, where you can earn over 5 per cent with a solution in as little as 3 months at the moment.”