Want to increase your savings? Opening a tax-free cash ISA is a safe way to earn extra cash and they're very easy to set up. Here's a beginner's guide to ISAs.

According to our National Student Money Survey, 82% of you have at least some money in savings. If you're one of them, you might want to consider opening a Cash.

ISAs or ‘Individual Savings Accounts' are basically savings accounts that allow you to keep your money without paying tax on the interest you earn.

Despite a change in the law that means you're unlikely to pay tax on interest as a student, there are still some benefits to opening an ISA. Read on to learn the pros and cons of opening an ISA as a student, as well as our top options.

What's in this guide?

How do ISAs work?
Why are ISAs good for students?
How to open an ISA account
The best readily available cash ISAs
The best fixed rate cash ISAs

What are ISAs and how do they work?

Simply put, cash ISAs are a type of ISA which is itself a type of savings account. For reference, there are five main types of ISAs:

• Cash ISAs
• Help to Buy ISA (no longer available to new customers)
• Finance Innovation ISAs (where you basically lend money to someone and they pay you back with interest)
• SAIs for life
• Shares and ISA shares (a way to invest in the stock market tax-free).

As we mentioned earlier, a big selling point for an ISA used to be the fact that you wouldn't have to pay any tax on the interest that pays the account. This is something that used to have to do with interest paid by other types of accounts.

But thanks to a law change in 2016, base raters (anyone earning less than £50,270 a year) can now earn up to £1,000 of free interest a year on any savings account. This has led some to argue that ISAs are now redundant, but we suggest that is not the case at all, as we will explain shortly.

Types of cash ISA

Like other savings accounts, Cash ISAs come in two main forms:

Easy-access cash ISAs

An Easy Access Cash ISA allows you to withdraw your cash when you need it. But more importantly, you can't get it back if you've reached the annual ISA allowance (£20,000 for the 2022/23 tax year). This refers to the amount you can deposit, not your total balance (we'll explain more in a second).

Interest rates on readily available ISAs are often variable. This means that they may increase or decrease in the future. These may include tempting (but temporary) higher bonus interest when you first open your account.

Bonus rates, on the other hand, are usually fixed, meaning they will remain the same for as long as they are applied.

Fixed-rate cash ISAs

Fixed rate cash ISAs come with a guaranteed (usually higher) interest rate, but your money is locked in for a fixed time. This is usually (but not always) one to five years.

The trade-off for these higher interest rates is that, unfortunately, you will be charged a penalty if you withdraw early. You could lose any interest you earned, and you could even lose money on your original investment if the penalty exceeds the interest you earned.

In other words, only go for a fixed rate ISA if you want to put your money in and leave it there.

How much money can you put in an ISA?

You can put a maximum of £20,000 a year into your ISA, and this applies to all accounts if you have more than one ISA.

It's important to remember that it's each deposit that counts towards your limit, not how much you actually have there. So if you had £30,000 in an ISA at the start of the tax year, you can add an extra £20,000 to it over the next 12 months.

Unfortunately, this also means that if you put in £1,000 but decide to withdraw £500 a few months later, it will still count as £1,000 of that year's ISA allowance.

Flexible ISAs

There are some nuances to deposit allocation if you have a flexible ISA. If you have one of these accounts, you can withdraw money and return it to your Cash ISA in the same tax year (April 6 to April 5) without reducing your allowance for the year.

So, to use the same example above, imagine you had £30,000 in your ISA at the start of the tax year. You then put an extra £1,000 into the account, reducing your allowance to £19,000 for the rest of the year.

However, if you later withdraw £5,000, you can get £24,000 into the account in the same tax year – the £5,000 you withdrew plus the £19,000 you have left over from your original contribution.

However, remember: this trick only applies to flexible ISAs (each cash ISA will say whether it's flexible or not). If your ISA wasn't flexible, your allowance wouldn't have increased to £24,000 in this example, so paying back the £5,000 you took out would reduce your remaining allowance to £14,000.

Can you have two ISAs at the same time?

You can have more than one Cash ISA, but you can  open or pay into one each year. Note that you can pay into more than one type of ISA per year (eg a Cash ISA and a Stocks and Shares ISA), but not two Cash ISAs.

You can also switch from one ISA to another if you notice a higher interest rate with another provider. But you'll need to confirm that the new ISA allows transfers and that your current bank won't charge you a withdrawal penalty (if you have a fixed-rate ISA).

Why should you open an ISA?

It's true that £1,000 of tax-free interest for basic rate taxpayers might make you think an ISA is no better than your standard savings account. But it's worth remembering that all ISA interest is tax-free, regardless of how much interest you earn elsewhere. So even if you exceed the £1,000 interest limit with your other savings accounts, the interest on your ISA will always be tax-free.

Also, the £1,000 discount only applies to basic rate taxpayers (those earning less than £50,270 a year). Once you enter the highest rate (when you earn between £50,271 and £150,000 a year), your tax-free rate drops to £500. you will not have any tax-free distributions.

And most importantly, because all ISA interest is always tax-free, it means it's hidden from the Student Loans Company. Remember that your Student Loan repayments are based on your taxable income, and the more you earn, the more you pay each month.

No matter how much interest you earn on an ISA account, it will never count towards your earnings. Therefore, you will never increase your Student Loan payments.

Should you open an ISA or a savings account?

As you may have guessed, it's best to think long term when it comes to an ISA.

At this point it may seem silly to think about being in a tax bracket with interest of more than £1,000 a year or more. But if you save for a long time and get a high-paying job, you may end up being taxed on your interest.

Let's say you've kept all your savings in your checking or savings account since you were a student, and after a few years you find yourself in a situation where you have to pay interest  your savings.

Now you can decide to move your savings into an ISA to get that tax-free interest, but there's a catch. you can put a maximum of £20,000 into an ISA a year.

Again, this may seem like a lot of money, but if you've already paid into a Lifetime or Help To Buy ISA that year (something you should definitely consider), you may not be able to transfer all of your savings. an ISA.

That said, despite the long-term benefits of opening an ISA, there's no denying that interest rates are currently quite low.

You'll likely earn more by putting your money in a high-interest checking or savings account. But bear in mind that you may pay tax on the interest, which in turn may factor into your benefits, maintenance loan eligibility and student loan repayments.

How to open an ISA account

Setting up an ISA is fairly easy. In most cases, you can do this online, in store, or over the phone.

Different banks will have different policies on how to properly set one up. But usually need much more than your National Insurance number, some ID and proof of address. And if you're setting up an ISA with your current bank, you probably won't need that much.

Of course, you should also make sure you haven't set up another Cash ISA in the same tax year.

What to consider before opening a cash ISA

Here are some important questions to ask before opening a Cash ISA:

• What is the interest rate and does it include a term bond?
• Can you get a better deal by transferring an existing ISA (and are you allowed to transfer money in or out)?
• Can you withdraw your money if you need to (ie is it a cash access ISA)? Some accounts charge a notice period penalty, so you lose a certain number of days to cash out.
• Some accounts will pay monthly/annual interest on your checking account, which is useful for spending extra money.
• Make sure the provider uses the Financial Services Compensation Scheme (FSCS) to protect your savings up to £85,000 (all the ones we've listed below, that is).

Best easy-access ISAs

If you want the benefits of tax-free interest, but also want the safety net of having access to your money when needed, look for easy access accounts.

Just remember that the following interest rates are variable. This means they can go up or down once the account is opened.

Taking into account interest rates and opening deposits, these are our best easy-to-access ISAs:

1.Cynergy Bank Online ISA (1.40%)

Open for £1

Interest Paid: Annually

Entry: open and online access

Are transfers allowed Yes, but only at the time of opening the account?

Flexible? no

Withdrawals: Unlimited.

2.Marcus Cash ISA (1.30%)

Open for £1

Interest paid: monthly

Login: Online

Are transfers allowed No?

Flexible? no

Withdrawals: Unlimited.

3.Al Rayan Bank Instant Access ISA (1% expected profit rate)

Open for £50

Entry: Open online or by mail, access by mail or app

Are transfers allowed Yes?

Flexible? no

Withdrawals: Unlimited

Additional information: This ISA is Shariah Compliant. This means it offers an “expected return” instead of a fixed rate, which is why it's not ranked first. There are other ISAs with better interest rates (including some not listed here), but of the easily accessible, Shariah-compliant cash ISAs, this is the best.

Best fixed-rate ISAs

You'll often need a larger deposit to open a fixed-rate ISA, and you'll be penalized for early withdrawals. Instead, you'll usually get a better rate than an easy-to-access ISA.

Fixed rate ISAs with longer terms (meaning your money is locked up for longer) usually have better interest rates. You have to balance how much you want a good interest rate and how soon you want to withdraw money.

Here's our pick of the best fixed-rate ISAs, taking into account interest rate, minimum deposit and term:

1.Leeds Building Society Two-Year Fixed-Rate Cash ISA (2%)

Open: £100

Interest paid annually or at maturity

Entry: Open and apply online, in branch or by mail

Are transfers allowed Yes?

Early withdrawal penalty: 150 days interest.

 

2.OakNorth Bank 12-Month Fixed-Rate Cash ISA (2.02%)

Open for £1

Interest paid. at maturity

Entry: open online or through the app

Are transfers allowed Yes?

Early withdrawal penalty at 90 days interest.

 

Use money saving resources to save extra for your ISA.