Chip launches cash. Isa pays a rate of 4.75% – is that good?

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A new Isa account with instant access has been launched by savings and investment app Chip.

The Chip instant access to cash* Isa pays a rate of 4.75 per cent and represents the first dip into the cash Isa market. Only a handful of providers offer higher rates.

The account is completely flexible, allowing savers to deposit and withdraw their money immediately, without restrictions and without affecting their Isa balance.

This means savers can replace any money they withdraw from their Isa without it counting towards their annual Isa allowance, as long as they replace the money in the same tax year.

Currently, Chip does not allow savers to transfer money to another cash Isa. This will be restrictive, especially given that current rules only allow savers to open one cash Isa account per tax year.

However, this will be simplified from April, with new rules being introduced that will allow multiple subscriptions to Isas of the same type each year.

Any money paid into Chip’s deal will be held by ClearBank and will be eligible for Financial Services Compensation Scheme protection of up to £85,000 per person.

This FSCS protection means that savers’ money up to £85,000 per person is protected if the company goes bust.

The app already offers stocks and shares Isa and Chip’s account for instant access* which pays a slightly higher 4.84 percent.

Chip’s Isa account pays just 0.09 percentage points less interest than this standard instant access account.

But because it’s an Isa, any interest earned on the money in the account – up to the annual Isa allowance of £20,000 – will be tax-free.

Someone putting £20,000 into Chip’s 4.84 per cent direct access account would earn £968 in interest in a year, compared to £950 in interest on Chips’ 4.75 per cent direct access Isa*.

While a basic rate taxpayer would not exceed their annual tax-free savings allowance of £1,000 with a £20,000 deposit, a higher rate taxpayer (someone earning £50,271 to £125,140 per year) would easily exceed their lower allowance of £500 .

On £968 of annual interest, a higher-rate taxpayer gets the first £500 tax-free, but is taxed at 40 per cent on the remaining £468, meaning they are left with £780.80 after tax.

Simon Rabin, CEO of Chip, said: “This is a big moment for Chip and is the next step in our mission to become a trusted, one-stop destination for wealth building.

“Rising interest rates have changed the landscape, so our priority was to develop a product that gives our users a tax-efficient way to get the most for their money, with all the convenience they have come to expect.

“We have a lot in store for 2024 and this launch is just the beginning.”

How does it compare to other tax-free deals?

Ultimately, the fact that Chip does not yet offer savers the option to transfer an existing cash Isa to them will be seen as a major disadvantage.

However, for anyone looking to set up a new cash Isa this tax year or perhaps for the first time, this could be a good option. Please note that you cannot open two cash Isa accounts in the same tax year – albeit for the time being.

Although Chip’s new Direct Access Isa easily beats the average rate of 3.32 per cent in terms of rates, it is still beaten by ten other Isa money providers, according to Moneyfacts.

However, many of these come with a few catches.

For example, Coventry Building Society’s 5.05 per cent Four Access Isa limits savers to four free withdrawals per year.

Similarly, the MoneyBox 5.09 per cent cash Isa includes a bonus rate of 0.94 per cent for the first twelve months, and limits savers to three free withdrawals per year.

Another easily accessible Isa deal is currently offered by Zopa Bank.

Her cash Isa offers 5.08 per cent, including a bonus rate of 0.5 per cent until April 6.

That said, Zopa’s Smart Isa is a hybrid cash Isa, combining easy access and fixed-term features under one roof.

It also gives savers the option to transfer from another Cash Isa provider, which is a big plus.

> Read: When will interest rates fall? Predictions about when the base interest rate will fall

Savings rates peaked above 6 percent, but have fallen sharply since the fall

At a time when savings rates have fallen from their summer highs and speculation has turned to when the Bank of England will cut the base rate, savers may prefer to have this option in one app.

The best fixed-rate cash deals are now just under 5 percent. In August, NatWest offered 5.7 percent for a one-year fix and 5.9 percent for a two-year fix.

The question for savers is whether they should take the opportunity to cut rates and lock in almost 5 percent now, before they are all gone.

At the moment the best easy access rates are above the best fixed interest rates, but these rates are variable and therefore could change quickly if the Bank of England starts cutting the base rate.

Last week, the Bank of England again maintained its key interest rate at 5.25 percent, remaining at the level since August last year.