Saving into a cash ISA means that you’ll never have to pay any income tax on the interest you earn on that account. You can pay up to £20,000 into an ISA each tax year and, just like standard savings accounts, there are several types of cash ISAs to choose from.
This guide takes a detailed look at how 2-year fixed rate cash ISAs work.
The Financial Services Compensation Scheme (FSCS) guarantees that it will step in to compensate the first £85,000 (£170,000 for a joint account) you have saved with a UK-authorised bank, building society or credit union in the event that the business goes bust.
A 2-year fixed rate cash ISA is a cash ISA that requires you to lock away your savings for a term of 2 years. In return, you’ll receive a fixed rate of interest that will typically be higher than you’d get on an easy access account.
Most 2-year fixed rate cash ISAs won’t allow you to withdraw any funds from your account during the term. If you can take the money out, you will usually pay a penalty fee. This is often a set number of days’ interest. You also won’t usually be able to pay any additional funds into your account once you’ve made your initial deposit, so this type of account is best suited to those with a lump sum to invest.
When comparing 2-year fixed rate cash ISAs, you’ll need to check the minimum deposit requirement. In some cases, it can be a few hundred or a few thousand pounds, so you’ll need to make sure you can meet this requirement or find another option. If you want to transfer in funds from an existing ISA, you’ll also need to check whether your chosen provider permits this. Transfers do not count towards the current year’s ISA allowance.
At the end of the 2 years, your cash ISA will mature and you can usually choose to withdraw your cash or have the money transferred to another ISA.
The personal savings allowance was introduced in 2016 and means that all basic rate taxpayers can now earn up to £1,000 a year tax-free on any interest from savings and current accounts. Higher rate taxpayers can earn up to £500, while additional rate taxpayers have no personal savings allowance.
Because of this, you might be wondering if it’s worth putting your money in a cash ISA – particularly if you’re a basic rate taxpayer. However, keep in mind that at a time when interest rates are rising, if you have a decent amount in your savings pot, you could get closer to reaching your personal savings allowance, which means you’ll start paying tax on your savings interest. By contrast, if you save that money in an ISA, you’ll never pay tax on your savings, no matter how much interest you earn.
For this reason, you might want to put some of your savings in a cash ISA and some in a standard savings account.
You can usually open a cash ISA in the same way as any other savings account. Depending on the provider, you might be able to do this online, over the phone, by post or in branch. You will usually need to provide a few personal details such as your name, address and date of birth.
If you’re not an existing customer, you might also have to provide proof of ID, such as a passport or driving licence, and proof of address, such as a bank statement or utility bill. Some digital banks will be able to verify your identity electronically, so you won’t need to provide these documents.
If you want to transfer funds in from another ISA elsewhere, you’ll also need to fill in a cash ISA transfer form, providing details of the ISA you wish to be transferred.
Our best fixed-rate cash ISAs are the highest interest rates available. To get the latest rates, we use Moneyfacts data, which covers nearly the full market of savings products and is checked and updated daily. We don’t include accounts from private banks.
All the cash ISAs in our list have savings protection – for most, this is the Financial Services Compensation Scheme (FSCS). Other schemes include that of NS&I, which is 100% backed by HM Treasury, and the Gibraltar Deposit Guarantee Scheme.
| Rates up to | 4.5% AER |
|---|---|
| Number of accounts | 80 |
| Minimum investment | £1 |
| Opening options | Branch, website, mobile app, post, telephone |
If you’ve got a lump sum to invest (that’s less than £20,000) and you are comfortable with leaving those funds untouched for 2 years, a 2-year fixed rate cash ISA is an option worth considering. As well as earning a fixed rate of interest for those 2 years, you won’t need to pay tax on any of the interest you earn.
Remember, you can now pay into more than 1 cash ISA during the tax year. So you may not want to tie up all your money in one fixed-rate product if there’s a potential to secure a better rate later on.
Find all you need to know about 5-year fixed-rate cash ISAs and scan live rates.
Find all you need to know about 3-year fixed-rate cash ISAs and scan live rates.
Learn more about the pros and cons of 1-year fixed rate cash ISAs