Should you be using your cash Isa allowance ahead of any other savings account?

The battle for cash Isa savings has intensified in recent days, with a flurry of best buy tax-free rates launched.

Moneybox delivered a new market leading easy-access cash Isa paying 4.65 per cent on deposits from £500.

The saving and investing platform subsequently said thousands of cash Isas were opened within 72 hours and millions in funds were deposited.

Shawbrook Bank was hot on its heels – upping the rate on its easy-access cash Isa to 4.56 per cent the following day.

On  a cloud: Cash Isa rates have seen a boost across easy-access and fixed rate accounts over the last few days

In the world of fixed-rate cash Isas, Paragon Bank was busy boosting the rate on its one and two year fixed rate deals to 5.82 per cent, propelling them to the top of the best buy tables.

Cash Isas have been overlooked by many as a home for savings because the rates they offer typically lag non tax-free accounts.

The average rate paid on easy-access cash Isas is 3.07 according to website Moneyfacts.

But savers’ appetite for cash Isas has been whetted. The Bank of England’s Money and Credit report revealed that in July, cash Isas saw the largest inflows for the start of the tax year since Isas were launched in 1999.

Savers funnelled more than £3billion into Isas in July – the highest inflows for July since 2014.

In the first three months of this tax year, savers piled more than £9billion into cash Isas.

What’s next for cash Isa rates?

We asked savings experts where rates could go next and whether these accounts are now worth a look.

Andrew Hagger, founder of personal finance website MoneyComms, says: ‘We may see a slight uptick in easy-access Isa rates if base rate is increased on 21 September (for the 15th time in a row), however that’s far from certain with the next inflation numbers released the day before.’

‘The 6.2 per cent rate from NS&I has currently thrown the one year fixed-rate bond best buys out of kilter, as nobody can compete with that – so we may see some providers turn their attention to the fixed rate Isa market instead.’

James Blower, founder of website Savings Guru, also expects providers are holding firm on rising rates until the next base rate decision.

He says: ‘Easy-access Isa rates have nudged up and fixed Isas are holding firm, but we don’t expect significant further changes until nearer the next base rate decision.’

‘Our view is that fixed-rates Isas have likely peaked now – there may be a few basis points movement but we expect them to ease back slightly if anything.

‘Easy-access rates may have some more still to go – if the base rate goes to 5.5 per cent next Thursday, and peaks at 5.75 per cent as many financial experts expect, then we could see easy-access cash Isas go to 5 per cent.

But Andrew Hagger believes there may be more to go for cash Isas and that one year fixed-rate cash Isas could peak at around 5.9 per cent, while easy-access cash Isas could peak at 4.75 per cent in the coming weeks.

He doesn’t expert rates on cash Isas to fall away any time soon though.

He says: ‘Competition remains intense in the cash Isa market with many savers using tax free accounts to mitigate their tax situation after exceeding their Personal Savings Allowance, so I don’t expect to see rates dropping away much in the next couple of months.

What are the benefits of saving in a cash Isa?

One reason that savers may be looking to cash Isas to shelter their savings is because rising interest rates could result in consumers with larger pots breaching their PSA.

Blower says: ‘Cash Isas are definitely worth a look now for taxpayers because, with interest rates the highest they’ve been for over a decade, the Personal Savings Allowance is no longer protecting much of savers interest from paying tax.’

For this reason, cash Isas can offer considerably more suitable longer-term tax-free benefits.

Introduced in 2016, the PSA allows basic rate taxpayers to take home up to £1,000 worth of savings interest tax-free each year, while higher rate taxpayers get £500. 

Additional-rate payers receive nothing.

Blower explains: ‘A basic rate tax payer will pay tax on interest on the best one year rate with just over £16,000 in it and £8,000 for higher rate tax payers.

‘Although the interest rates on Isas are lower, once the tax is taken in to account, they can provide a better return with interest being paid tax free.’

Read more here: Will you be hit by a tax bill on your savings as rates rise?

This post first appeared on Dailymail.co.uk