On the money: Current account or Isa? Where to put your cash

If you have money in a cash Isa, you could be forgiven for wondering why. The rates offered have shrunk so much that the best deals currently available are worse than you could get in an interest-paying current account.

According to research by analysts Defaqto, the average instant access Isa pays just 0.79% on £1000, while the average payout on the few remaining current accounts paying interest is 1.58%.

So wouldn’t you be better off simply tracking down a decent current account?

The fact is it’s getting harder to do so. The number of interest-paying current accounts has more than halved from 22 to nine in the past five years. And the number of accounts that pay interest on balances above £10,000 has shrunk from 16 to two.

So if you’re serious about your savings, an Isa is likely to offer better long-term value.

However, anyone attracted by the tax-free aspect of an Isa should be aware that there’s no need to pay tax on some of your savings since the personal savings allowance was introduced last April.

This allows you to earn up to £1000 a year in interest without being taxed on it, although if you’re a higher-rate taxpayer the allowance is just £500.

That means savings in standard accounts have been automatically earning interest tax-free since the allowance came into effect at the beginning of the current tax year.

So is there any point to a cash Isa? There’s a strong argument for it if you may plan to invest in funds at some time.

You can now switch easily between cash savings and investment funds in an Isa, which gives savers greater flexibility to move between the options.

But there’s also the positive possibility that your tax situation may change. If you received a promotion or moved to a higher-paying job, you might move into a higher tax-rate band.

That could mean your personal savings allowance halving, which could hit you if you had a decent nest egg. If your savings are in an Isa, there would be no effect.

By the way, if you have children, it’s worth reminding yourself about Junior Isas.

They allow you to save tax efficiently for younger members of the family and, from Thursday, you will be able to save or invest £4128 into a Junior Isa, an increase from the current level of £4080.