Savers will be rushing to use their Isa allowance before the end of this tax year to avoid losing it. 

For those who are looking to maximise the tax-friendliness of their savings pot, a flexible Isa can be a useful tool in their arsenal.

A flexible Isa lets you withdraw your money and, crucially, put it back again without affecting your annual allowance – provided you pay it back in the same tax year.

Flexibility in an Isa is a useful feature when it comes to keeping as much of your savings tax-free as possible. Here’s why.

Flexible friend: A flexible Isa can help to maximise the tax friendliness of your Isa

Flexible friend: A flexible Isa can help to maximise the tax friendliness of your Isa

What are the benefits of a flexible Isa?

A flexible Isa is most beneficial for those with large cash pots who are able to max out their £20,000 Isa allowance each year.

In effect, they allow you to withdraw from your Isa and put it back in without losing your annual allowance, something which you cannot do with a non-flexible Isa. 

James Blower, founder of website Savings Guru said: ‘For example, if you put £20,000 in a cash Isa and then take £5,000 out, in a non-flexible Isa you lose that £5,000 from your allowance. 

‘With a flexible Isa, you can put it back in and not lose your allowance. Taking it to an extreme, a saver can put in £20,000 on 6 April, take it out on 7 April and put it back in on 5 April the following year and keep their full £20,000 allowance even though it has only been in the account for two days of the tax year.’

There is a caveat, though. If you don’t replace any cash withdrawn by the end of the tax year, you will lose the ability to return the balance to your Isa without it impacting your annual allowance.

Sarah Coles, head of personal finance at Hargreaves Lansdown said: ‘If you’re using your whole Isa allowance, and want to dip in on a regular basis, you might benefit from a flexible Isa, which allows you to top back up to the full allowance later in the tax year.

‘This may include those who want to put their emergency fund into a cash Isa. You need flexibility on this, because you don’t want to be hampered when it comes to withdrawals.’

How can they protect you from a savings tax raid? 

With interest rates rising by so much over the last two years, many more savers will be paying tax on the interest they earn on their savings, as they are using up their Personal Savings Allowance with smaller deposits.

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

But now with the best easy-access savings accounts paying 5 per cent or more, a basic rate taxpayer with £20,000 saved would start losing interest to tax.

The best easy-access account on the market currently pays 5.08 per cent and is offered by Charter Savings Bank.

Someone putting £20,000 in this easy-access account would earn £1,040 of interest in a year, so even a basic rate taxpayer would exceed their £1,000 annual tax-free savings allowance with a £20,000 deposit, while a higher-rate taxpayer (someone earning £50,271 to £125,140 a year) would easily exceed their lower allowance of £500.

On £1,040 of annual interest, a higher rate taxpayer gets the first £500 tax free, but will be taxed at 40 per cent on the remaining £540, which means they would end up with £824 after tax.

Even a basic rate taxpayer would end up paying £16 tax on their savings with this account, leaving them with £1,024.

Savings tax has a dampening effect on the best easy-access accounts. It turns the shiny rate on Charter Savings Bank’s best buy easy-access account to 4.06 per cent if you are a basic rate tax payer and 3.05 per cent if you are a higher rate tax payer.

Anna Bowes, co-founder of website Savings Champion said: ‘For those people, using their cash Isa is likely to be a great option, in order to earn as much interest as possible, as the interest will be tax free, regardless of the amount.’

Our picks of the five best cash Isas for 2024

Products featured in this article are independently selected by This is Money’s specialist journalists. If you open an account using links which have an asterisk, This is Money will earn an affiliate commission. We do not allow this to affect our editorial independence.

Plum* easy-access – 5.15%

– Facts: £100 to open

– Transfers in: Yes

 Moneybox easy-access – 5.11%

– Facts: £500 to open

– Transfers in: Yes

Castle Trust Bank one-year fix – 5.09%

– Facts: £1,000 to open

– Transfers in: Yes 

OakNorth Bank two-year fix – 4.7%

– Facts: £1 to open

– Transfers in: Yes 

Moneybox Lifetime Isa – 4.4%

-Facts: £1 to open

– Transfers in: Yes 

What are the best flexible Isas on the market?

A lot of banks and building societies don’t offer flexible Isas – and some that do will have limits on the number of withdrawals you can make per year before your rate plummets.

To make the most of a flexible Isa, you will also want to be able to transfer old Isas into the pot. That means choice is narrowed down further as some Isa providers also don’t allow this.

Anna Bowes said: Chip, which is an app-only provider, offers a flexible easy access Isa paying 5.1 per cent.’  

‘For those who’d prefer not to use an app-only account, Principality Building Society’s Online Bonus Isa is paying 5 per cent.’

While James Blower said: Zopa’s easy-access Isa is flexible and pays 5.08 per cent. Zopa’s Isa allows savers to open fixed Isa pots within the Isa – so savers could put £10,000 in an easy-access and £5,000 in a one-year fixed Isa and another £5,000 in a two-year fixed Isa.’

> Find the best cash Isa deals using our tables 

How can they help keep more of your savings tax free?

Flexible Isas allow savers to take out some of the cash in their cash Isa for short term needs, and replace it back into the tax-free account, within the same tax year, without the replacement counting towards your Isa allowance.

Anna Bowes says: ‘It means that those who might need to dip into the Isa savings can do so freely if they have fully utilised their allowance. 

‘Before the flexible Isa rules were introduced, if you had fully used your Isa allowance and made a withdrawal from your Isa, you would not have been able to replace the money, therefore losing the tax-free status of that cash.’

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