Regular Savings Cash ISAs

Regular saver ISAs explained

Regular savings ISAs can be ideal for those looking to reach their savings goals. They ask you to commit to saving a small amount each month and in return you’ll earn tax-free interest, which could make them a great addition to your savings portfolio.

Most providers will have a limit on the amount you’ll be able to save each month, which makes them particularly suitable for those who take a “little and often” approach to saving. It also means you’ll easily be able to stick within your annual ISA allowance, as you’re restricted in how much you can save.

Just bear in mind that you may be required to make a set number of payments each year, and can be penalised if you miss a monthly deposit. This could be a loss of interest penalty, but in some cases could result in closure of the account. Withdrawals may also be restricted and there can be opening restrictions as well (some accounts are only available to locals, for example), and you may be limited in how you can open and manage the account.

How does interest work on regular savings cash ISAs?

It’s important to note that interest payments can work a little differently on regular savings ISAs, and you may earn less than you’re expecting – typically, the amount of interest you’ll actually receive will be around half of the headline rate.

This is because you’re drip-feeding money into the account on a monthly basis, rather than saving a lump sum all at once. So for example, let’s say you’ve chosen an account that pays 4% interest over the year and are looking to save £500 a month, or £6,000 in total. In the first month you’ll earn 4% on £500, in the second month you’ll earn it on £1,000 and so on. It’s only in the final month that you’ll earn 4% on the full £6,000.

Regular saver ISA or regular savings account?

On your search for a regular saver, you may be wondering whether to opt for a cash ISA version or a standard regular savings account. At first glance, the interest rates offered on regular savings accounts are far higher than for cash ISAs, so if rate is your main criteria, you’ll likely be swayed that way.

Yet the key advantage of a regular savings ISA is its tax-free status, with returns always free from tax regardless of how much you have saved. Of course, thanks to the personal savings allowance this may not be too much of a concern – basic rate taxpayers can earn up to £1,000 in interest tax-free each year, or £500 for higher rate taxpayers – but if you think you’ll breach your limit, a cash ISA version may be the way to go.

Alternative types of ISA to consider

Not sure if a regular saver ISA is right for you? Consider these options instead.

Easy access cash ISA

Easy access cash ISAs can offer a lot more flexibility than a regular savings version, letting you add as much as you want to your pot and most allowing restriction-free withdrawals as well (but make sure to check the terms and conditions of your chosen account, as some providers limit the number of withdrawals that are allowed each year). Yet the downside is that there’s no incentive to save, which means it can be easier to get out of the habit. This means it’s important to consider the options carefully, and remember, there’s nothing to stop you from getting both kinds of account to maximise your savings potential.

Stocks and shares ISA

If you’re seeking higher returns than can be achieved with a cash savings account, you may like to consider a stocks and shares ISA instead. These offer the potential for far greater gains, yet they also come with a lot more risk, and you may end up with less than you put in. But if you’re comfortable with that, you could consider setting up a monthly direct debit to invest in a stocks and shares ISA, which still lets you save regularly with the chance to secure a larger pot at the end – and of course, all returns will still be tax-free. 

Alternatively, to get a wider view of the best deals out there, make sure to check out our weekly update of the best ISA rates available.