by Ben Salisbury

Individual savings accounts (ISAs) were introduced in April 1999. They are tax-free savings accounts, but the majority of us don’t have one despite the government simplifying the rules and increasing the limit you can save in a tax-efficient manner.

As of April 6th 2010, all adults can invest £10,200 in an ISA each tax year. You can open one cash ISA and one stocks and shares ISA each year. You can invest a maximum of £5,100 into a cash ISA each year and a maximum of £10,200 into a stocks and shares ISA, or you can put £5,100 into each.

Although stocks and shares ISAs do generally attract higher returns over the long term, cash ISAs are a safer bet and tend not to be so volatile. Cash ISAs cannot go down in value, though you do need to monitor if the rate of interest you are receiving outpaces inflation.

There are a variety of different types of cash ISAs including easy access, fixed rate and notice accounts. Notice accounts tend to attract slightly better interest but you can’t get at your money immediately. Fixed-rate accounts also usually have better interest rates, but these are set for a period, during which the Bank of England base rate could rise and better deals could become available.

If you believe that you can put away a reasonably regular amount over more than three years, a stocks and shares or fixed-rate cash ISA will probably be the best choice. If you think that you will be able to save less frequently and are looking to put some cash aside to attract interest – but that you may need access to the money at any time – an easy-access cash ISA is likely to be the best choice.

The current rates for easy-access cash ISAs are not great but have improved slightly since the summer, when the best deal came from Santander at 2.50 per cent. When choosing a cash ISA, your main concern should be bonus rates. Most of the top deals include an introductory bonus rate that normally lasts for 12 months. When this runs out your cash ISA will not be competitive, so you need to switch to a better provider that accepts transfers in of funds.

When you move funds from an ISA that now has a low rate to a new ISA with a better rate, you need to make sure the old provider treats it as a transfer or you will lose the tax break. So, don’t close the account down and then deposit the money into your new cash ISA, but arrange for the old provider to transfer it to the new provider.

For the next tax year, beginning on the 5th April 2010, the government has announced that the tax-free ISA allowance will increase to £10,680 and that children will also be able to get an ISA with the introduction of Junior ISAs next autumn.

Here are the top eight current best deals for instant access-cash ISAs.

Provider InterestAER InterestPaid RateType TransferIn Transactions by: Minimum investment
Santander Flexible ISA (Issue 3) 2.85% Annually Variable No Internet, phone or branch £1
Halifax ISA Direct Reward 2.80% Annually Variable Yes Internet, phone or branch £1
Principality e-ISA Issue 2 2.80% Annually Variable Yes Internet £1
Cheltenham & Gloucester Cash ISA 2.70% Monthly Variable Yes Post or branch £1
Intelligent Finance Cash ISA 2.50% Monthly Variable Yes Internet or phone £1
Northern Rock Easy ISA 2.50% Annually Variable Yes Post or branch £1
Nationwide BS e-ISA 2.42% Annually Variable Yes Internet £1
Lloyds TSB Cash ISA Saver 2.35% Annually Variable Yes Internet, phone or branch £1

Use myfinances.co.uk’s comparison site to find the best deal on an ISA.

Santander is still at the top of the best-buy table, with its Flexible ISA (issue 3). The account tracks base rate plus 2.35 per cent for 12 months, so if base rate goes up, so will the rate of this ISA. However, the down-side to this account is that it does not allow transfers in.

The next best deal comes from Halifax with its Cash ISA, offering a rate of 2.8 per cent. This ISA also allows transfers. With both Santander and Halifax you can get an even better deal if you have a current account and pay in at least £1,000 per month. Santander’s Loyalty Flexible ISA pays three per cent and is also open to those who hold a mortgage or investment product with Santander, whilst Halifax’s ISA direct reward also pays three per cent.

Both of the current accounts on offer here are good ones. Halifax pays you £5 every month as long as you pay in £1,000 and Santander pays five per cent on credit balances as long as you deposit £1.000 each month. Remember, both of these ISA deals track base rate plus 2.5 per cent for 12 months. Make a note to review your options after that.

The Principality BS e-ISA Issue 2 has a good rate and the bonus rate, which lasts for 12 months, is only one per cent above base rate. The Cheltenham & Gloucester cash ISA pays 2.7 per cent: 1.7 per cent is a bonus rate applicable for 12 months.

The Intelligent Finance cash ISA is set at 2.5 per cent but unlike most of the others, there is no bonus rate. I think this makes it one of the very best. Of course, the rate could go up or down, but not being so severely penalised at the end of a bonus period is a real advantage and makes this product stand out from the rest. It accepts transfers in too.

The Nationwide e-ISA requires a card-based account before you can apply for it and the Lloyds TSB cash ISA saver has a 1.35 per cent bonus rate that lasts for 12 months. Both accept transfers in.

Overall, I think Halifax comes out on top in terms of rates and associated products, and the fact that you can transfer funds in gives it the edge over Santander’s product. However, the two products at 2.50 per cent from Intelligent Finance and Northern Rock are also excellent because there is no bonus rate associated with them.

Use myfinances.co.uk’s comparison site to find the best deal on an ISA.