7 of the biggest Isa myths debunked

A third of people are missing out on tax-free savings by not having an Isa, according to new research by NatWest.

The bank's survey of 10,000 UK adults also revealed confusion over what an Isa offers, with a third of respondents saying they are unaware of the annual tax-free allowance of £20,000. 

Young savers are particularly in the dark, with over a fifth of 18-24-year-olds admitting they haven't even heard of Isas.

Here, Which? debunks seven myths about Isas, shedding light on exactly what they offer and why savers might think about opening one.

Myth 1: You can only open one cash Isa

Up until recently, you could only put money into one of each type of Isa every tax year. It meant you couldn't, for example, split your annual allowance between an instant-access and fixed-term cash Isa, or hold money in multiple stocks and shares accounts.

Those rules changed last April, and savers can now open and pay into as many Isas as they like within the financial year. The change was intended to encourage competition between providers and make it easier for savers to take advantage of higher returns. 

However, providers are under no obligation to embrace these new freedoms when it comes to their own products. So if your bank offers the top deal for two types of cash Isa, but has decided not to adopt the new rules, you might need to settle for a lower rate elsewhere for one of your accounts.

• Find out more: best cash Isas 2024

Myth 2: Traditional savings accounts always offer better rates

There is a commonly held belief that choosing an Isa means accepting a lower rate in exchange for the tax-free savings allowance.

That's certainly the case if we compare interest rates on fixed-term savings accounts and their cash Isa equivalents. Moneyfacts data shows the average rate on a one-year bond, for example, has beaten cash Isa deals every month for the last two years.

But it's the exact opposite for instant-access products, with cash Isas consistently offering higher average rates than traditional accounts over the same time period. 

Which? Recommended Provider Zopa currently tops the charts with a rate of 5.05% AER on its Easy Access Isa. That's significantly better than the best instant-access savings account from GB Bank, which offers returns of 4.6%.

We could see interest on cash Isas climb even higher over the next couple of weeks as providers compete for savers looking to use up any remaining allowance by the end of the financial year.

Myth 3: You should wait until the end of the tax year to open an Isa

It's true that rates get a boost in February and March, but there is a second 'Isa season' to watch out for.

The start of the new tax year on 6 April is when the tax-free allowance renews, and many providers hike interest rates on cash Isa products to entice savers.

If you have the funds to do so, consider maxing out your £20,000 allowance at the beginning of the financial year. Not only does investing earlier remove some of the pressure to make a hasty decision at the end of the tax year, it also means your cash will be put to work for longer.

Myth 4: Withdrawals can't be paid back in

Flexible Isas were introduced in 2016 to prevent customers from being penalised if they needed to access their savings. Flexible Isas allow you to withdraw funds from an Isa and replace it, without it affecting your annual Isa allowance – as long as you do so in the same tax year.

Banks and building societies, however, are under no obligation to provide flexible Isas, so you'll need to check the small print when comparing accounts.

• Find out more: what is an Isa?

Myth 5: Moving money is a hassle

In 2024-25, new rules came into force that allowed you to transfer part of your account balance from one Isa provider to another, no matter when the money was paid in. 

Previously, you had to transfer your entire Isa of that type from the current tax year or nothing at all. 

The change means that you can now keep some funds with your existing provider and retain that account.

Myth 6: You can only beat income tax

While opening a cash Isa will help shield your savings from income tax, a stocks and shares Isa can help you sidestep paying capital gains tax (CGT) on your investments. 

Stocks and shares products let you invest up to £20,000 a year without having to pay a penny in CGT. Plus any income such as interest or dividends will also be free from tax.

However, if you already hold investments, you can't transfer them into your Isa. Instead you can opt to sell them, transfer the money to your Isa, and use that cash to buy the investments back – this is known as 'Bed and Isa'.

Bear in mind that there can be charges involved with buying and selling, and you'll generally have to pay slightly more to buy an asset than you'll receive when you sell it. There's also a chance that the price will go up between your selling and buying it back, which could cost you. But if the price falls, that could work to your advantage.

If you make a gain from selling the shares that exceeds your CGT allowance (currently £3,000), it could also trigger a tax bill.

• Find out more: what is a stocks and shares Isa?

Myth 7: The tax-free allowance is definitely being cut

Chancellor Rachel Reeves will provide an update on the state of the economy in her Spring Forecast on 26 March. Despite the government insisting otherwise, rumours have been flying that the announcement will include new measures including major Isa reforms.

One prominent rumour has been that the tax-free cash Isa allowance will be reduced from £20,000 to just £4,000.

However, the latest reports in national newspapers have poured cold water on suggestions that an Isa shake-up is imminent. It's now understood that no changes to the Isa system will be unveiled this month, although the government is apparently still considering reforms in the future.

• Find out more: cash Isa rules and allowances