Variable Rate Cash ISAs

What is a variable cash ISA?

Variable cash ISAs typically come in two forms: notice ISAs and easy access ISAs.

Variable rate ISAs with a notice period usually require some advance warning before the bank or building society will let you withdraw funds from your account. Some accounts will permit withdrawals without this notice period, but this will typically result in an interest penalty.

Easy access ISAs, meanwhile, generally allow additions and withdrawals without limit, offering complete flexibility. However, some providers restrict how many withdrawals can be made in a year, so make sure to check.

Whichever kind you choose, your savings interest will remain tax-free for as long as your money is held within the ISA. This means you can accumulate quite a savings pot over time, which may otherwise have gained enough interest to breach the Personal Savings Allowance (PSA). The tax benefits of ISAs depend on your personal circumstances and may change in the future.

Just be mindful of your annual ISA allowance. You’re still only able to save up to £20,000 in an ISA per tax-year – which can be split across different types of ISA if you prefer.

How do variable rate ISAs work?

Variable rate ISAs are fairly straightforward. After opening a variable ISA and making your initial deposit, you can usually continue to add to your savings without restriction (as long as you don’t exceed your ISA allowance).

You can typically also withdraw money from your account, although look out for any penalties that may apply after making a certain number of withdrawals. Notice ISAs will require you to wait a notice period before accessing your money.

If your ISA is flexible, you can withdraw and replace funds within the same tax-year without affecting your allowance. However, if it isn’t, any deposit into the account will count towards your allowance, even if you’re replacing money that you’ve previously withdrawn.

While the money is in the variable ISA, it will earn interest. But, because the rate is variable, the provider could raise or lower the interest rate at their discretion.

Tax benefits of variable rate ISAs

Variable ISAs have the same tax benefits as any other ISA as the interest you earn is exempt from income tax.

By contrast, if your money was in a standard savings account instead of an ISA, you may need to pay tax on your interest, depending on the tax band you’re in and the size of your savings.

How to get the best variable ISA rates

To get the best variable ISA rates, it’s important to compare the market thoroughly. Make sure to look at features of the account beyond the headline rate, such as withdrawal restrictions, and bear in mind that you may need to be flexible when it comes to provider – the top rates often come from challenger or digital banks, and even accounts from more traditional brands will often ask you to manage things online.

The time of year could have an impact as well. Most providers tend to offer their best rates around ISA season, as they look to encourage savers to use up the last of their ISA allowance for one tax-year and start early on the next. Such heavy competition means it can be a great time to compare ISA rates, but that doesn’t mean you shouldn’t bother at other times of the year.

Our chart outlines the best variable cash ISA rates on offer at all times, helping you make the right decision for your requirements.

Maximising your savings with a variable rate ISA

Keeping your money in the same variable cash ISA could mean you miss out on higher rates of interest.

However, one of the perks of a variable cash ISA is that it’s relatively easy to maximise the return on your savings if you regularly review the market and switch provider if there’s a better rate available.

For example, if the rate on your existing variable ISA is about to drop or you see a different ISA is offering a more competitive rate, you can transfer your ISA balance to earn as much interest as possible on your savings.

Easy access ISAs typically allow you to transfer to a different ISA without penalty. Notice ISAs also allow ISA transfers, but there will be a penalty charge if you transfer before the end of the notice period.

Understanding variable rate ISAs: Flexibility vs. uncertainty

Variable cash ISAs are designed to be accessible, offering easy access to your money either with or without a notice period. Yet there also comes an element of uncertainty – because the rates are variable they can change at any time, so you can never be sure of your returns.

This is in contrast with fixed rate ISAs, which typically do not allow any access until a certain period has passed, in exchange for receiving a fixed rate of interest. Most will only allow lump sum deposits as well, which means that you’ll know exactly how much interest you’ll receive after the term comes to an end.

It used to be the case that the longer the fix, the higher the rate, but today that’s no longer guaranteed.

In many cases, variable cash ISA rates can actually be higher than for fixed rate deals. Just bear in mind that even the best variable ISA rates can lessen over time, though while this makes it a gamble, the access options these accounts offer could make it worth the risk.

Variable cash ISA vs. standard savings account: What’s right for you?

You may be wondering whether you should opt for a variable cash ISA or a standard easy access savings account.

At first glance, the non-ISA deal may seem like the obvious choice, particularly given that standard variable rate deals tend to pay higher interest rates than their cash ISA alternatives. There are also fewer restrictions, with most not capping the amount that can be invested, and they won’t normally have such set rules on transfers or withdrawals.

However, the main benefit of ISAs is their tax-free status, and for some, this can be key. Those who are higher-rate taxpayers and/or have built up a substantial savings pot may find that they breach their Personal Savings Allowance (PSA) by keeping their cash in non-ISA products, so instead opt for a variable cash ISA to reduce their tax liability.

Things to consider before opening a variable rate ISA

Before opening a variable rate ISA, make sure you’ve considered:

• the interest rate
• the minimum deposit requirements
• how you want to open and manage your ISA
• whether there any restrictions or penalties on withdrawals.

It’s also worth thinking about the overall savings market and your individual financial situation, as locking into a fixed rate ISA could be more beneficial for some savers.

How do I open a variable rate ISA?

To open a variable ISA, you’ll need to be a UK resident aged 18 or over. Crown employees and members of the armed forces serving overseas are also eligible to open a variable ISA, as are their spouses or civil partners.

You’ll need to tell the ISA provider details such as your name, current address and any previous addresses, typically from the past three years. The provider will also require your National Insurance number.

Once your account is open, you’ll need to make a minimum deposit which could range from £1 to several thousand pounds.

On our chart above, click “view further details” to see the minimum deposit requirements of each ISA, as well as its other features.

Other ISA options to consider

Not sure if a variable rate ISA is right for you? Consider these options instead:

• A stocks & shares ISA could be a great choice for those who are happy taking on a bit of extra risk for the potential of greater returns. Just remember that there’s no guarantee – your returns are based on the performance of your chosen funds rather than a pre-agreed interest rate, and there’s the chance you could end up with less than you initially invest.
• If you’re saving up for your first home or want an extra savings pot for retirement, you may like to consider a lifetime ISA. These offer a Government top-up of 25% on everything you save, though you’re restricted to depositing up to £4,000 a year and can’t access the money for anything other than a first home or retirement.
• If you want to get into the savings habit while continuing to benefit from tax-free returns, a regular savings cash ISA could be another option.

Take a closer look at our ISA charts to see what else is available, and stay up to date with our regular overview of the best cash ISA rates on offer.