Cash ISAs Hit 4.71% as Allowance Narrows for Under 65s

In May 2026, the savings landscape presents a compelling figure for those seeking tax-efficient returns: a two-year fixed-rate Cash ISA now offers up to 4.71% AER. This rate, available from providers such as Charter Savings Bank and Secure Trust Bank (offering 4.72%), stands out against the Bank of England's decision to hold the Base Rate at 3.75% for the second consecutive time.

For those preferring more immediate access, easy-access Cash ISAs are also competitive, with rates reaching 4.62% AER, notably from Trading 212, and Plum Cash ISA offering 4.6% (variable). A one-year fixed term can yield up to 4.70% with AlRayan Bank Meteor Savings, while three-year fixed options are available at up to 4.65%.

The Enduring Value of the ISA Wrapper

The primary appeal of a Cash ISA remains its tax-free status. Interest earned within this wrapper is entirely exempt from UK income tax, regardless of the amount. This is a crucial distinction from standard savings accounts, where interest above your Personal Savings Allowance (PSA) is subject to tax. For a basic rate taxpayer, the PSA is £1,000; for a higher rate taxpayer, it's £500. Anything above these thresholds is taxed at your marginal rate.

The current ISA allowance for the 2026/2027 tax year, which commenced on April 6, 2026, is £20,000. This generous allowance can be allocated across various ISA types, including Cash ISAs, Stocks and Shares ISAs, and Lifetime ISAs. For first-time buyers, a Lifetime ISA allows contributions of up to £4,000 per year, attracting a 25% government bonus, equating to up to £1,000 annually.

A Significant Shift: The Cash ISA Allowance Reduction

However, a notable change is on the horizon. From April 6, 2027, the start of the 2027/2028 tax year, the cash ISA subscription limit for individuals under 65 will be reduced to £12,000. The overall ISA allowance will remain £20,000, meaning the remaining £8,000 would need to be directed into other ISA types, such as Stocks and Shares ISAs, to fully utilise the allowance. Chancellor Rachel Reeves confirmed this change in the Autumn Budget 2025, a move seen by some as an encouragement towards broader investment.

Those aged 65 and over will be exempt from this reduction, retaining their ability to contribute up to £20,000 to Cash ISAs. This creates a two-tiered system, a complexity not seen in previous ISA frameworks.

“Higher inflation is unavoidable,” warned Andrew Bailey, Governor of the Bank of England, citing rising oil prices due to the conflict in the Middle East. This suggests that while rates are currently competitive, their real value could be eroded.

Inflation's Persistent Shadow

While the headline rates of up to 4.71% appear robust, it's important to contextualise them against inflation. The Consumer Prices Index (CPI) inflation reached 3.3% in the 12 months to March 2026, remaining above the Bank of England's 2% target. This means that while your money is growing, its purchasing power is still being quietly eroded. Even with these improved interest rates, cash may struggle to deliver meaningful real returns over the long term if inflation continues to outpace earnings.

The Bank of England's Monetary Policy Committee voted 8 to 1 to maintain the Bank Rate at 3.75% in April, with one member preferring a 0.25 percentage point increase. This indicates a cautious but not entirely unified stance on future rate movements, with the Bank's commentary suggesting higher rates are likely this year.

What this means for you

With the best Cash ISA rates now exceeding inflation, it's a pertinent time to review your savings. For those under 65, the impending reduction of the Cash ISA allowance to £12,000 from April 2027 means that maximising your £20,000 allowance in the current tax year (2026/2027) could be a strategic move if you prefer cash savings.

Practical Steps Right Now

• Review Your Current Savings: Check the interest rates on your existing savings accounts, both ISA and non-ISA. Many older accounts offer significantly lower returns.
• Consider Transferring: If your current Cash ISA isn't offering a competitive rate, consider transferring it to one of the top providers. Ensure you follow the correct ISA transfer process to maintain its tax-free status.
• Utilise Your Allowance: For the 2026/2027 tax year, you can still contribute up to £20,000 across your ISAs. If you are under 65 and primarily use Cash ISAs, consider fully funding your allowance before the April 2027 reduction.
• Explore Other ISA Types: If you're a first-time buyer, investigate the Lifetime ISA for its 25% government bonus. For longer-term goals, consider whether a Stocks and Shares ISA might be appropriate for a portion of your savings, especially given the upcoming Cash ISA allowance changes.

When Effective

The top Cash ISA rates mentioned are effective as of May 2026. The current £20,000 ISA allowance is for the 2026/2027 tax year. The reduction of the Cash ISA allowance to £12,000 for under 65s will come into effect from April 6, 2027.

Where to Get Help

For personalised guidance on your financial situation, consider seeking advice from an independent financial adviser. Organisations like MoneyHelper also offer free, impartial guidance on managing your money.

This is not financial advice. Seek independent financial guidance. Interest on standard accounts may be subject to tax above your Personal Savings Allowance.