‘Can I open two cash ISAs to profit from rising rates?’

“I have two fixed-rate cash ISAs that I opened a few years ago. They both pay interest of 0.5% and are due to mature in the next financial year. 

I hold £55,000 in one account and £75,000 in the other. Would I be allowed to open two new cash ISAs in the next tax year and transfer money from the old ones? Could I then contribute money from other non-ISA accounts into the two new ISAs that I’ve set up? 

The reason I want to keep the pots of money separate in two accounts from different providers is because of the £85,000 limit for protecting savers’ funds under the Financial Services Compensation Scheme. 

I am quite happy to keep my funds in cash ISAs rather than stocks and shares as I am a low risk investor.

I am also mindful that interest rates are on the rise so I only want to lock in an interest rate for a year.”

Robert W 

Troubleshooter says:

Now that savings rates are rising, cash ISAs are becoming more popular for people who want to avoid paying income tax on their interest. 

Basic-rate taxpayers can earn up to £1,000 in savings interest each financial year before they have to pay tax on the earnings. This is known as the personal savings allowance. The limit falls to £500 for higher rate taxpayers, while people in the top tax band (earning more than £150,000 a year) don’t get an allowance at all.

But ISAs are exempt from this rule meaning you don’t pay tax on any interest earned, making cash ISAs particularly appealing for the wealthiest in society. For more information on the personal savings allowance, read our guide.

Every tax year you get an ISA allowance of £20,000. Yet there are lots of rules around ISAs that you should be aware of.

Crucially, you can only open one of each type of ISA in a tax year. For example, you could open a cash, stocks and shares and a Lifetime ISA all in the same year.

But you wouldn’t be allowed to open two new cash ISAs in the next financial year, which starts on 6 April 2023.

However, transferring your money from one ISA to another is different: as you would only be moving ISA money that you had saved in previous years this doesn’t count as opening a new ISA.

So to answer your question, you are allowed to transfer the money from your two accounts into new ISAs in the same tax year.

When you have chosen a new ISA provider that you want to switch to, contact that company and fill out its transfer form. It will then manage the transfer on your behalf. This can take up to 15 days for cash ISAs.

It’s important that you follow the transfer process rather than moving money from the ISA yourself, otherwise you lose the annual allowance from previous tax years. 

For more information on ISAs and the different types, read our guide.

You also asked whether you can top up your new cash ISAs with money from other bank accounts. You can only contribute into one of each type of ISA in a tax year. As you would be transferring money from non-ISAs, this would count as a fresh investment.

So if you wanted to top up the savings in your two cash ISAs, you would have to choose one to contribute into.

After you have paid money into that cash ISA, you wouldn’t be allowed to top up the other one in the same tax year.

Merging your two pots into a single cash ISA might make them easier to manage. But I also appreciate your argument for wanting to maximise the protection offered by the FSCS. This scheme protects deposits of up to £85,000 if your provider goes bust.

By splitting your savings between two companies, it gives you £85,000 protection on each pot.

It’s worth checking the overarching company that owns your ISA provider to ensure that you do get as much protection as possible. This is because the limit applies across all the accounts you hold among providers within the same group.

For example, Lloyds, Halifax, and the Bank of Scotland are all part of the same group. So if you were to split your £130,000 savings between those banks, the FSCS would only cover you up to £85,000.

You locked in your current rate of 0.5% when rates were at a record low, meaning you earn just £650 a year.

But now that rates are climbing you could earn thousands of pounds on your large pot of savings. The top one-year fixed-rate ISA is from Coventry Building Society and pays 3.95% and the second best is from Secure Trust Bank paying 3.90%. We outline the top-rated cash ISAs.

But remember that inflation currently exceeds 10%, which is more than twice as high as the top rates on savings accounts. This means that the value of your savings is actually falling.

Investing would give you the best chance of beating inflation. Some investment platforms let you open a stocks and shares ISA and select a “cautious” risk level which might be suitable for you. Find out which stocks and shares ISAs we rate highly.

The rules around ISAs can be complicated so it’s sensible of you to check. Now you can start earning some real money on your savings.