Best tax-free cash ISAs for students

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

According to our National Student Money Survey, 74% of you have at least some money in your savings – and if you’re one of them, you might want to consider opening a cash ISA.

Cash ISAs, or ‘Individual Savings Accounts’, are basically savings accounts that let you store your money without having to pay tax on any interest you make.

Due to a recent change in the law that made it unlikely you’ll ever pay tax on the interest from a regular savings account, some people have argued that ISAs are now a bit pointless.

But there are still some perks to opening an ISA which make them well worth your consideration, so buckle up as we take you through the pros and cons of opening an ISA as a student.

What are ISAs and how do they work?

piggy bank

Put simply, cash ISAs are a type of ISA, which in turn is a type of savings account. For reference, there are four main types of ISA:

As we touched on earlier, the big selling point of an ISA used to be the fact that you don’t have to pay any tax on the interest the account pays out – something you previously did have to do with the interest paid by other types of account.

But thanks to a change to the law in 2016, basic-rate taxpayers (anyone earning under £50,000 per year) can now earn a total of up to £1,000 of interest tax-free in any savings account each year. This has led some to argue that ISAs are now redundant, but we’d suggest that isn’t the case – as we’ll explain in a bit.

Types of cash ISA

Much like other savings accounts, cash ISAs come in two main forms:

  1. Easy-access – This means you’ll be able to withdraw your cash if and when you need to, but you may not be able to put it back if you’ve exceeded the annual ISA allowance (£20,000 for the 2019/20 tax year). Interest rates are sometimes variable (meaning they may increase or decrease in the future) and may include a tempting (but temporary) higher bonus interest when you first open the account.
  2. Fixed-rate – These accounts come with a guaranteed (usually higher) interest rate, but your money’s locked away for a fixed period of time (usually a year or more) and you’ll be charged a penalty fee if you withdraw early.
    You may also lose any interest you’ve accumulated, and could even lose money on your original investment if the penalty fee exceeds the interest you gained. In other words, only go for a fixed-rate ISA if you’re happy to put your money away and leave it.

How much money can you put in an ISA?

10 pound notes

You can put a maximum of £20,000 a year into your ISA, and this applies across all accounts if you have multiple ISAs.

It’s important to remember that it’s each deposit that counts towards your limit, not how much you actually have in there. So if you had £30,000 in an ISA at the start of the tax year, you could still add an extra £20,000 to it over the next 12 months.

Sadly, this also means that if you deposit a grand but decide to withdraw £500 a few months later, it will still count as 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 cash ISA, but you can only open or pay into one each year. Note that you can pay into more than one type of ISA each year (e.g. a cash ISA and a stocks and shares ISA), just not two cash ISAs.

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).

Why should you open an ISA?

Admittedly, the £1,000 tax-free interest allowance may make you think that an ISA is no better than your bog-standard savings account. But it’s worth remembering that all ISA interest is tax-free, no matter how much interest you’re earning elsewhere. So even if you exceed the £1,000 interest limit with your other savings accounts, your ISA interest will always be tax-free.

What’s more, the £1,000 allowance only applies to basic-rate taxpayers (those earning under £50,000 per year). As soon as you enter the higher-rate bracket (when you earn between £50,001 – £150,000 per year) your tax-free interest allowance drops to £500, and if you’re the world’s richest student and earn over £150,000 per year, you’ll have no tax-free allowance at all.

And crucially, as all ISA interest is always tax-free, it means it is hidden from the Student Loans Company. Remember, your Student Loan repayments are based on your taxable earnings, and the more you earn, the more you repay each month.

So regardless of how much interest you’re earning in an ISA account, it will never, ever be factored into your earnings – meaning it will never, ever increase your Student Loan repayments.

Should you open an ISA or a savings account?

confused woman shrugging

As you might have twigged by now, it’s best to be thinking long-term when it comes to ISAs.

Right now it might seem silly to think about earning over £1,000 in interest a year, or being in the higher-rate tax band. But if you save over a long period of time and secure a well-paid job, you might suddenly find yourself getting taxed on your interest after all.

Say you’ve kept all your savings in your current account or savings account since your student days, and after a few years found yourself in a situation where you’re having to pay interest on your savings.

You may now decide to move your savings into an ISA to get that interest tax-free, but there’s a catch: you can only deposit a maximum sum of £20,000 a year into an ISA.

Again, this may sound like a huge amount of money, but if you’ve already been paying into a Lifetime or Help To Buy ISA that year (something you should definitely consider!), you may not be able to transfer all your savings into an ISA.

That said, despite the long-term benefits of opening an ISA right now, there’s no denying that interest rates are currently pretty poor. You’ll probably earn more by putting your money into a high-interest savings or current account – just bear in mind that you may have to pay tax on the interest, and it may count towards benefits, Student Finance claims and Student Loan repayments.


How to open an ISA account

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. And 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 cash ISA in the same tax year.

What to consider before opening a cash ISA

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.

Here are our top pick easy-access ISAs:

  1. OakNorth Easy Access Cash ISA (1.44%)

    oaknorth logo

    Open with: £1

    Bonus: None

    Interest paid: Monthly

    Access: Online

    Transfers: Yes

    Instant access? Yes

    Get the OakNorth ISA »

  2. Virgin Money Double Take E-ISA (1.43%)

    virgin money logo

    Open with: £1

    Bonus: None

    Interest paid: Annually or monthly

    Access: Online

    Transfers: Yes

    Instant access? Only twice per year

    Extra info: Two withdrawals a year is a pretty strict limit, and it’s worth noting that even closing your account will count as a withdrawal.

    Get the Virgin Money ISA »

  3. Shawbrook Bank Easy Access Cash ISA (1.43%)

    shawbrook bank logo

    Open with: £1,000

    Bonus: None

    Interest paid: Annually or monthly

    Access: Online and phone

    Transfers: Yes

    Instant access? Yes

    Extra info: Not an option if you’d like to start by saving a small amount, and each withdrawal has to be at least £500.

    Get the Shawbrook ISA »

  4. Al Rayan Bank Instant Access ISA (1.35% expected profit rate)

    al rayan bank

    Open with: £50

    Access: Phone, online and branch

    Transfers: Yes

    Instant access? Yes

    Extra info: This ISA is Sharia-compliant, meaning it offers an ‘expected profit rate’ rather than an interest rate. There are other ISAs with better interest rates (including some not featured here), but among easy-access Sharia-compliant cash ISAs, this is the best of the bunch.

    Get the Al Rayan ISA »

Best fixed-rate ISAs for students

You’ll often need a larger deposit to open a fixed-rate ISA, and you’ll be penalised for withdrawing money early – but in return you’ll usually get a better interest rate than an easy access ISA.

Fixed-rate ISAs with longer terms (i.e. when your money is locked away for longer) usually have better interest rates, so it’s a case of balancing how much you’d like a good interest rate against how soon you’ll want to cash out.

Here’s our pick of the top fixed-rate ISAs, taking into account both the interest rate and term:

  1. OakNorth One – Three Year Fixed Rate Cash ISA (1.61% – 1.86%)

    oaknorth logo

    Open with: £1

    Interest paid: Monthly

    Access: Online

    Transfers: Yes

    Extra info: OakNorth has separate ISAs for one, two and three year terms, with each close to being the highest (if not the highest) rate for each period. A one year ISA comes with a 1.61% interest rate, two years at 1.77% and three at 1.86%.

    Get the OakNorth ISA »

  2. Shawbrook Bank One Year Fixed Rate Cash ISA (1.54%)

    shawbrook bank logo

    Open with: £1,000

    Interest paid: Annually or monthly

    Access: Online

    Transfers: Yes

    Get the Shawbrook ISA »

Use these money saving resources to save some extra funds for your ISA.