Budgeting & Banking

Best tax-free Cash ISAs for students

Want to boost your savings? Getting yourself a tax-free ISA is a surefire way to make some extra cash, and they're super easy to set up. Here's your beginner's guide... 

Best ISAs for students

Source: Giphy

Ok, so an ISA might not make you quite rich enough to roll around in mountains of cash (we wish...), but over a period of time it can add up to a serious boost in finances.

The ISA, or ‘Individual Savings Account’, is basically a bank account that lets you save money without paying tax on any interest you make.

What is interest? It's essentially extra money you make when you deposit some cash in a savings account, and is worked out as a percentage of how much money is in there. So if you deposit £1,000 with an interest rate of 0.1%, at the end of the year the bank will give you an extra £1 in interest (essentially free money).

The big selling point of an ISA used to be the fact that you don't pay any tax on this interest - as you would with a typical savings account.

However, now basic-rate tax payers (anyone earning under £46,350) can earn up to £1,000 interest in any savings account without having to pay any tax on it.

Despite this, there are still some perks to opening an ISA which are worth considering and could pay off in the long run - buckle up, and we'll take you through it.

Other types of ISA, such as the Help to Buy ISA or Lifetime ISA might be a better investment and are designed to help you save up for your first home, so make sure to check these out too.

Why ISAs are good for students

summary of ISAs

Credit: Nickelodeon

As we've already said, any interest you accumulate in an ISA is tax-free - meaning it's hidden from the HMRC (the tax man). But more importantly for students, it's also hidden from the Student loans Company.

It’s a completely legit way to ensure any money you save doesn’t prematurely nudge you over the repayment threshold when you graduate.

For similar reasons, you don't want to declare any tax-free savings you or your folks have when applying for student finance (and some state benefits), as doing so could reduce any payout you're otherwise entitled to.

It's also worth thinking long-term here. Of course right now it might seem silly to think about earning over £1,000 in interest a year, or being in the higher rate tax threshold, but if you save over a long period of time and secure a good job, this could feasibly happen.

If you've squirrelled your money away in an ISA over time, you don't have to worry about moving your savings across in a big lump sum at a later date (you can only deposit a max of £20,000 a year in an ISA).

Interest rates are currently super low, so you'll probably earn more by putting your money into a high-interest savings or current account (but you may then have to pay tax on the interest, and it may count towards benefits and Student Finance claims).

How do ISAs work?

the lowdown on ISAs

Credit: 20th Century Fox

Cash ISAs come in two flavours:

Easy Access: You can withdraw your cash if you need it - but you may not be able to put it back if you've exceeded the ISA allowance which is currently £20,000 a year. Interest rates are variable (they may go up or down later on) and may include a tempting, but temporary, higher bonus interest when you first open the account.

Fixed Rate: Guaranteed (usually higher) interest rate, but your money's locked away for a year or more, with penalties for early withdrawal. You might lose any interest you've accumulated or even lose money on your original investment. Only go for these if you’re happy to put your money away and leave it.

How much money can you put in an ISA?

You can put a maximum of £20,000 a year in your ISA, and this applies across all accounts if you have multiple ISAs. Remember, it's each deposit that counts towards your limit, not how much you actually have in there.

If you put in a grand but later withdraw half of it, you've still taken a £1,000 bite out of that year's ISA allowance.

Can you have two ISAs at the same time?

You can have more than one ISA, but you can only open or pay into one each year.

You can also switch from one ISA to another if you spot a higher interest rate with another provider - just check that the new ISA allows transfers and your current bank isn't going to charge you a penalty for withdrawing the money (if you have a Fixed Rate ISA).

How to open an ISA account

setting up an ISA

Credit: 20th Century Fox

Setting up an ISA is actually pretty easy - in most cases you can do it online, in store or by phone.

Different banks will have different policies on how exactly you go about setting one up, but in most cases you won't need much more than your National Insurance Number, some ID and a proof of address. If you're setting up an ISA with your current bank, it's likely you won't even need that much.

Of course you also need to make sure that you haven't set up another ISA account in the same tax year.

Before you set up a new ISA, here are some things to consider:

  • What’s the interest rate, and does it include a temporary bonus?
  • Can you get a better deal by transferring an existing ISA (and are transfers in/out allowed)?
  • Can you withdraw your money if you need it (instant access)? Some accounts charge a notice period penalty, where you lose a certain number of days' interest for withdrawing cash
  • Some accounts will pay interest monthly/annually into your current account – handy for extra spending money!
  • Make sure the provider uses the Financial Services Compensation Scheme (FSCS) to protect your savings up to £75,000 (all the ones we've listed below are).

The best easy access ISAs for students

If you want the benefits of tax-free interest, but also want the safety net of having access to your money when you need it, we'd recommend going with an easy access account.

  1. nationwideNationwide Single Access ISA (1.3%)

    Min deposit: £1

    Bonus: None

    Interest paid: Annually

    Access: Online, branch or mobile app

    Transfers: Yes

    Instant access? Only once per year

    Extra info: One of the better interest rates out there and doesn't rely on a bonus to plump up the deal. However, you can only make one withdrawal a year.

    Get the Nationwide ISA »

  2. nsandiNS&I Direct ISA (1.00%)

    Min deposit: £1

    Bonus: None

    Interest paid: Annually

    Access: Online and phone

    Transfers: No transfers in

    Instant access? Yes

    Extra info:  An easy access savings account - nothing fancy, but simple to use and run.

    Get the NS&I ISA »

  3. postofficephonePost Office Online ISA – Easy Access Issue 12 (0.25%)

    Min deposit: £100

    Bonus: 1.15% for the first 12 months

    Interest paid: Annually

    Access: Online

    Transfers: Yes

    Instant access? Yes

    Extra info: Take note of the bonus and switch when you need to.

    Get the Post Office Easy Access ISA »

  4. Al Rayan Bank logoAl Rayan Bank Notice Cash ISA (1.22% expected profit rate)

    Min deposit: £50

    Access: Phone, online and branch

    Transfers: Yes

    Instant access? Yes

    Extra info: This is the UK's only sharia-compliant instant access cash ISA. As such, it offers potential profits rather than an interest rate.

    Get the Al Rayan Notice Cash ISA »

The best fixed rate ISAs for students

If you've got the larger deposit needed to open a fixed rate account, these can be useful if you want to stash your cash where you can't blow it, with no need to worry about tracking a bonus rate.

  1. Newcastle Building Society logoNewcastle Two Year Fixed Rate ISA (1.30%)

    Min deposit: £500

    Interest paid: Annually or monthly

    Access: In branch, by post, by telephone, online or by secure message

    Transfers: Yes

    Extra Info: You'll need to keep your cash in the account for two years to feel the benefits (you'll lose 120 days' interest if you want to withdraw). Once you've stumped up your initial £500 you can continue to add cash when you can.

    Get the Newcastle Two Year Fixed Rate ISA »

  2. Halifax Online SaverHalifax ISA Saver Fixed (1.00 - 2.25%)

    Min deposit: £500

    Interest paid: Annually

    Access: Online, phone and in branch

    Transfers: Yes

    Extra Info: You get the higher rate of 2.25% interest if you choose the five year option, and the lower 1.00% interest rate for committing your cash for two years instead. If you want to withdraw your cash early you'll lose either 180 or 365 days on interest, meaning you'll get back less than the amount you invest, so think carefully if this is right for you.

    The account can qualify you for the Halifax Savers Prize Drawer, if the idea of a risk-free flutter floats your boat.

    Get the Halifax ISA Saver Fixed »

The perks of an ISA

save smart with ISA

Credit: BBC

Interest is free money. If you're not using it to your advantage, you're losing out. It basically involves 'breeding' your spare cash.

If you get a tidy lump sum from your folks, and have a rock-solid money plan, putting the bulk of it into an ISA to earn extra on it will probably pay off in the long run.

The same works if you have an interest-free overdraft that you know you won’t need straight away, or any other spare cash you accumulate over the next few years. Do the sums for yourself, and then make sure your money's working as hard as you are.

Try an automatic savings app or bot to save up some quick cash from your current account.

What are your banking tips for saving money? Let us know in the comments. 

Leave a comment

Leave a Facebook comment