Budgeting & Banking

Best tax-free Cash ISAs for students

Want to be wealthier? A special, tax-free type of savings account – called an ISA – could boost your cash and make you better off in the long run.Change purse with coinsCredit: hills_alive – Flickr

The ISA, or ‘Individual Savings Account’ is a way to save money without paying tax on the interest it makes. You may also hear them called NISAs (New Individual Savings Accounts) – but we’re going to keep it simple and stick with ‘ISA’.

Many students won't earn more than the personal allowance, so your current account or savings interest won't be taxed anyway (ask your bank to refund you if it's been slicing off the taxman's cut). But, even if you don't think you'll benefit from an ISA right now, knowing how they work could save you money, earn you more interest and bolster your student finance applications. So read on!

Hold-off opening a new ISA until plans for a new Government-backed Help to Buy ISA are finalised in 2015. If these come about, you'll get free extra cash to put towards a house deposit. Watch this space.

Why ISAs are nicer for students

Mug with slogan 'I'd rather be rich'Credit: gawd0r – Flickr

Interest that stays in an ISA stays tax-free, effectively cloaked from HMRC (the tax man) – and 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 later on.

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.

The other reason is that the ISA allowance comes with an annual limit that resets each April. If you don’t put any money away at all, you’ll lose your tax-free wrapper for that year. Five years down the line when you're a regular Joe Schmoe taxpayer, this is going to bug you.

Interest rates are currently lower than a rapper’s pants. You may 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 or have it count towards benefits and student finance claims).

The ISA low-down

Man looking through magnifying glassCredit: paurian – FlickrISAs 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. Interest rates are variable (they may go up or down later on) and may include a tempting, but temporary, bonus.

Fixed-rate: guaranteed (usually higher) interest rate, but your money's locked away for a year or more, with penalties for early withdrawal. Only go for these if you’re happy to put your money away and leave it.

You can have more than one ISA, but you can only open or pay into one each year. The ISA allowance is the same no matter how many accounts you have, and 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. For 2017/18 you can stash up to £20,000 in an ISA.

Things to consider:

  • What’s the interest rate, and does it include a limited-time 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 x number of days' interest for withdrawing cash
  • Some accounts will pay interest monthly/annually into your current account – handy for extra spending money, but note the money's no longer tax free if you don't keep it in your ISA!
  • Make sure the provider uses the Financial Services Compensation Scheme (FSCS) to protect your savings up to £85,000 (all the ones we've listed are).

The best easy-access ISAs for students

  1. nationwideNationwide Regular Saver ISA (2%)

    Min deposit: £1

    Bonus: None

    Interest paid: Annually

    Access: Online, branch, mobile app

    Transfers: No transfers in

    Instant access? Yes

    Extra info: One of the better interest rates out there and doesn't rely on a bonus to plump up the deal, but there's a monthly limit on how much you can add to your account.

    Get the Nationwide ISA »

  2. nsandiNS&I Direct ISA (1.5%)

    Min deposit: £1

    Bonus: None

    Interest paid: Annually

    Access: Online, 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 2 (1.41%)

    Min deposit: £100

    Bonus: 0.76% 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 (2% expected profit rate)

    Min deposit: £250

    Access: Phone, online, branch

    Transfers: Yes

    Instant access? No, with a notice period of 120 days

    Extra info: This one's a sharia-compliant ISA. As such, it offers potential profits rather than an interest rate. Also available as an instant access account with a lower profit rate.

    Get the Al Rayan Notice Cash ISA »

The best fixed-rate ISAs for students

Frankly, fixed-rate ISAs aren't too compelling at the moment. But, if you've got the larger deposit needed to open a fixed-rate account, they 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 5-Year Fixed Rate ISA (2%)

    Min deposit: £500

    Interest paid: Annual/monthly

    Access: Online, branch, post

    Transfers: Yes

    Extra Info: One of the higher fixed rates out there, but you'll need to keep your cash in the account for 5 years to feel the benefits (you'll lose 180 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 5-Year Fixed Rate ISA »

  2. Halifax Online SaverHalifax ISA Saver Fixed (1.4 – 2%)

    Min deposit: £500

    Interest paid: Annually

    Access: Online, phone, branch

    Transfers: Yes

    Extra Info: Interest varies depending on how long you can fix your money away. To get the highest rate of 2% you'll need to bank your cash for 5 years. Withdrawals aren't allowed with this account, so think carefully if this is right for you. This 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 »

Save smarter

Man's hand giving a thumbs-upCredit: Sarah Reid – Flickr

Interest is free money. If you're not using that fact to your advantage, you're losing out. So think ‘breeding' your spare cash.

If you get a tidy lump sum from your folks, and have a rock-solid money plan, put the bulk of it into an ISA to earn extra on it. 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.

Leave a comment

Leave a Facebook comment