The trick that can transform your cash Isa into a flexible tax-free winner

What is the best thing to look for in a cash Isa?

A good savings interest rate is the obvious answer, but there is also a lesser known element that you may be missing that could be very useful in keeping your savings as tax-free as possible.

It’s something that all Isas can offer, but not that many, and it’s even more important now that rising interest rates are causing more people to lose interest due to savings tax on standard accounts.

The feature you should ask about is whether an Isa is flexible.

A flexible Isa is one where you can withdraw and pay back money without it counting towards your Isa benefit, as long as you replace it in the same tax year.

It transforms your Isa from something you try not to take money out of (for fear of losing the valuable tax-free protection) into a piggy bank you can dip into when you need to.

Flexibility is also a feature you can get in shares Isa, but it’s more useful for easy access to cash than investment pots.

The feature was launched in April 2016 by former Chancellor George Osborne – a man who enjoyed a bit of Isa tinkering – but has since flown somewhat under the radar.

I think that needs to change, especially now that higher rates and a freeze on income tax thresholds mean that more of our hard-won savings interest is being plundered by the tax authorities.

A flexible Isa is most beneficial for people with large pots of money and the financial firepower to top up their Isa every year, but it is also valuable in terms of changing financial behavior for those who cannot.

Because while most of us have little hope of using up our entire £20,000 Isa allowance each year, we still tend to put pots or cash we need into standard, easy-to-access savings accounts on rainy days .

When rates were low this didn’t matter so much as the personal savings allowance protected many from tax on their interest, even though the £1,000 allowance is halved for higher rate taxpayers and eradicated for higher rate taxpayers.

But with the most accessible savings accounts paying 5 per cent or more, a basic rate taxpayer who has saved more than £20,000 could stand to lose their interest in tax.

Meanwhile, a higher-rate taxpayer would have to pay tax on savings of more than £10,000.

We regularly urged readers to put their money into Isas and not just rely on the personal savings allowance, even though rates were low for this reason.

The savings tax has a chilling effect on the effective rate you receive; it changes the most accessible savings rate from 5.2 per cent paid by Coventry Building Society to 4.16 per cent for basic rate taxpayers and just 3.12 per cent for higher rate taxpayers.

Put your money into the Coventry BS Isa and you’ll get 4.9 per cent without having to worry about tax.

So why don’t we all put as much money as possible into flexible Isas?

Unfortunately, that’s because Isa flexibility isn’t a feature that caught on as well as it could have.

Many banks and building societies don’t offer it – and even some that do, its usefulness is somewhat offset by the limits on withdrawals per year before your interest rate plummets.

Plus, to take full advantage, you’ll also want to be able to transfer old Isas into the pot, which means the choice is further limited.

A round-up of the best deals in our cash Isa tables shows just how hit or miss it can be to find a cash Isa that gets all this right.

For example, the Coventry BS Isa mentioned above is flexible, but limits withdrawals to four per year, otherwise the rate falls. This is also the case with Virgin Money, which limits withdrawals to three.

Moneybox’s 5 percent fee table money Isa is not flexible and has withdrawal limits, while Shawbrook, Charter Savings Bank, Oaknorth and Cynergy all compete at the top of the table and have no withdrawal limits, but their Isas are not flexible.

Of the eight best cash Isas in our tables, the only one I can find that matches the flexibility, having no withdrawal limits and accepting transfers is Skipton’s Bonus Cash Isa, which pays out a healthy 4.9 per cent.

The catch is that 1 percent of that rate is a bonus that disappears after a year. At that point you have to hope that Skipton still offers a top deal with all these features, or look again for the flexible Isa needle in the haystack.

In the meantime, let’s hope more banks and building societies start offering flexible Isas and deals that don’t restrict withdrawals.

It would certainly help them stand out from the crowd – and we’ll soon be highlighting those who are flexible in our tables.