Can I earn interest on cash in my stocks and shares Isa?

Now the new tax year has begun, you might be considering what to do with your savings.

Stocks and shares Isas are a great way to protect your investments from tax on interest, profits and dividends.

But given ongoing stock market turbulence, you might be cautious or unsure where to invest your money, and instead opt to keep your contributions in cash for the time being.

We look at what happens to your uninvested cash and which of the most popular investing platforms offer the best rates.

Holding cash in an Isa for the long-term is unlikely to make you as many gains as investing

Is it a good idea to keep cash in your stocks and shares Isa?

Most platforms tend to pay out some kind of interest on cash held in a stocks and shares Isa. This varies from platform to platform, and can also depend on how much cash you’re holding.

You shouldn’t expect too much interest to be paid out, and it will certainly be less than if you kept cash in a bank or building society savings account. 

After years of low rates, interest on savings accounts has now reached its highest level in more than a decade.

The best easy-access savings accounts are now offering more than 3 per cent interest, the highest since September 2012, while fixed-term accounts are paying more than 4.6 per cent.

However, it can come with potential tax ramifications as it becomes a lot easier to breach the personal savings allowance. 

That’s why opting for the tax-free wrapper of an Isa will help you build your savings pot – although bear in mind that cash Isa savings rates are usually lower than standard savings rates for this reason.

> Read our essential guide to Isas

A stocks and shares Isa is a great way to build your savings pot as higher inflation erodes the value of your savings. Over the long-term, returns from cash have lagged behind the stock market.

If you’re worried about the volatility in the stock market, bear in mind that there is never a ‘good’ time to start investing – it is one of the biggest myths when it comes to investing.

Timing the market is near impossible, so waiting for the perfect time means you’ll miss out on gains.

Stocks and shares Isas offer the potential for investment returns, but many also pay out a small amount of interest on funds held in cash

Which platforms pay out interest on uninvested cash?

This week Saxo announced it had introduced a new interest rate model that allows clients to earn interest on their uninvested cash.

The rate paid will be updated daily based on the Sterling Overnight Interbank Average Rate (Sonia) benchmark, which means it reflects any adjustments to central bank policy. 

So, when the Bank of England raises its interest rate, Saxo customers will also see their deposit interest rate increase too.

Crucially there is no lock-in period or upper limit on the amount paid, and customers can also earn interest on all deposits in Sterling, Euro and US dollars.

Hargreaves Lansdown customers can earn 2 per cent on a Hargreaves Lansdown Isa, Junior Isa or Lifetime Isa if the account balance is £100,000 or more.

This falls to 1.5 per cent for accounts between £50,000 and £99,999.99 and 1.25 per cent for balances between £10,000 and £49,999.99. Customers with a balance of up to £9,999.99 will earn 1 per cent in interest.

Cash held in a fund and share account will earn 1.6 per cent gross interest on an account balance over £100,000, which falls by 20 basis points each tier, with an account balance worth up to £9,999.99 paying 1 per cent interest.

Elsewhere, Bestinvest pays a 3.1 per cent interest rate on all cash balances. 

While interest on Isas, Junior Isas and Sipps are paid free from UK income tax, interest on other accounts is paid gross. This means you will be responsible for paying any tax due on interest that exceeds any tax-free allowance.

Vanguard, popular among investors for its LifeStrategy funds, currently pays 2.2 per cent interest on cash held in an Isa, although this is a managed rate and is subject to change.

For customers using DIY investment platform Freetrade, they can earn 3 per cent on any uninvested cash if they pay for the Plus plan, which costs £9.99 a month.

Moneyfarm, which recently offered with eToro to offer a stocks and shares Isa, does not offer interest on any cash held, nor does Interactive Investor.

This post first appeared on Dailymail.co.uk