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Published 11 April 2024
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What You Need to Know About Fixed Rate Cash ISAs

A fixed-rate cash ISA is a tax-free savings account where you are paid a set rate of interest for locking your money away over a fixed period.

UK Interest rates have climbed significantly over recent years, giving cash ISAs the potential to provide savers with some real bang for their buck. It’s always better to earn some interest on your money rather than none whatsoever, and now savers can enjoy significant returns.

By choosing a fixed-rate ISA, you are likely to get a higher rate of interest than you would with an easy access ISA. This is because you’re required to lock your money away for a fixed period, typically between one and five years, whereas with an easy access account you can access your money whenever you need to.

Here, we explain what you need to know about fixed-rate ISAs. 

What is a fixed-rate ISA?

A fixed-rate cash ISA is an ISA where you are given a set rate of interest that is guaranteed for a certain period of time.

You deposit your savings when you open the account and then at the end of the term you can withdraw the money or switch it into a new fixed-rate ISA. If you take the money out before this point, you will usually face a penalty of loss of interest.

As with all ISAs, you won’t pay any tax on the interest you earn and you can put away up to £20,000 in the current tax year, which will end on 5 April. At this point, everyone (aged 16 and over) is given a brand new ISA allowance

How a fixed-rate cash ISA works

When you open a fixed-rate cash ISA account, you can deposit your savings (up to a maximum limit) and you’ll then earn interest, either monthly or annually, on your money until the end of the term.  

You can choose the length of the fixed-rate ISA from one to five years. Depending on how long you choose to put your money away for, the interest rate you are offered will change. Sometimes, a longer term can mean higher interest rates, but this is not always the case.

​​» MORE: A Guide to ISAs

How to open a fixed-rate ISA

You can open a fixed-rate ISA at a branch, online, by post, or sometimes over the phone. Each provider will have its own rules about how to open an account. Some will only be available online while others may only be available on a postal basis. 

How to choose a fixed-rate ISA

There are quite a few ISAs to choose from, so before you sign on the dotted line it’s important to make sure the account you’ve picked is right for you. To help you decide, here are some of the main pros and cons of a fixed-rate ISA.

Pros of a fixed-rate ISA

  • You’ll know exactly how much interest you’ll earn on your savings. 
  • By locking your money away you may be able to earn a higher rate of interest.

Cons of a fixed rate ISA

  • If you do need to access your money early, you may face a penalty.
  • If interest rates rise, and you’re locked into a fixed-rate ISA, you won’t be able to benefit.

What’s the difference between a fixed-rate ISA and a fixed-rate savings bond?

The main difference is that ISAs are tax-free, so you won’t be charged any tax on your savings held within an ISA. Although savings bonds are taxed, everyone has a personal savings allowance (PSA). This means basic-rate taxpayers can earn up to £1,000 a year and higher-rate taxpayers can earn up to £500 in interest a year before they start paying tax. Additional-rate taxpayers (those earning more than £125,140 per year) are not eligible for a personal savings allowance.

Can I add money to a fixed-rate ISA?

There is often a minimum amount you will need to open an account, which is typically between £500 and £1,000. However, some accounts can be opened with as little as £1. Some fixed-rate ISAs allow you to add extra money to an account when you open it for a limited period, for example, up to 30 days.

This money is then locked away until the end of the term of the account and you can’t usually add any extra money into it. You also can’t transfer the ISA into a new account until the end of the term. If you close the account early, or transfer the money within it to a new account, you’ll face a penalty. This is usually a loss of interest that can wipe out any gains you’ve built up so far. 

How is my money protected? 

All UK cash ISAs provided by banks, building societies, and credit unions are protected by the Financial Services Compensation Scheme (FSCS). This protects up to £85,000 per person, per banking group, if an institution goes bust.  

​​» MORE: ISA or Savings Account: Which is Best for Me?

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