Cash inflow into ISAs has been in decline for some time and some industry commentators have even been advising savers to avoid them altogether.

Their argument? There’s very little point as the low rates on offer meant the majority of people wouldn’t breach their Personal Savings Allowance (PSA) and they would be better off opting for higher rates offered on non-ISA accounts.

But as savings rates have increased this year, the balance required to earn enough interest to breach the PSA has plummeted, particularly for higher-rate taxpayers. As a result, ISA inflows have reversed the trend of recent years and inflows are rising.

It’s certainly true that the PSA removed some of the incentives to save within an ISA wrapper.

Basic 20% rate taxpayers can earn up to £1,000 interest a year from any and all savings without paying any tax on it; after that their interest is taxed at 20%. Higher rate taxpayers can earn up to £500 a year; after that their interest is taxed at 40%. Top 45% taxpayers don't get a PSA – all their interest is taxed at 45%.

Higher-rate taxpayers

However, there is a strong cohort of savers focused on building a strong cash savings position who can - and will - continue to benefit from the tax allowance an ISA can offer in the long term, particularly if they are a higher-rate taxpayer.

A higher-rate taxpayer needs a savings pot of approximately £11,775 before they start to incur enough interest on their savings to breach the PSA, based on the current top savings rate of 4.25%, at the time of writing. That has fallen from around £40,000 in September 2020, based on a one-year account paying 1.25% at that time.

Strong inflows

Savers have been responding. Data from CACI, which tracks savings flows from over 30 top providers, shows that there has been a positive net inflow of £1.8 billion into cash ISAs since the beginning of October, compared to an average net outflow of £1.3 billion during the same period across the previous two years.

Much of this money has gone into fixed-term ISA accounts offering better rates of return than instant access accounts, but the data also shows that a high proportion of the inflow has gone into accounts offered by the top six high street banks, which typically offer lower rates than those offered by smaller banks.

Derek Sprawling, Paragon Bank Director of Savings, says: “We’re seeing a return in popularity of ISAs this year, particularly fixed-term accounts which offer higher rates and the saver certainty in a volatile economic environment. Savers need to shop around to get the best deals as there is often a better rate available than those offered by their incumbent bank.”

He adds: “I would expect to see ISAs flows to continue to be strong, particularly for those who are higher-rate taxpayers or who want to build a long-term savings pot.”

To view our range of savings accounts, visit our Savings website.