What is a cash ISA?

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By Personal Investing Team

14 Jul 2019

While cash ISAs have fallen out of favour in recent years due to low interest rates, more than £39 billion was put into them in 2016-17. They can still be a good option for people to save tax free. 

How does a cash ISA work?

A cash ISA is similar to a regular savings account as you can pay in a lump sum or add money when you want, but you’ll never pay any tax on the interest you earn. 

The introduction of the personal savings allowance in April 2016 has made cash ISAs less attractive because basic rate taxpayers can now earn up to £1,000 of interest on any savings without having to pay tax. Higher-rate taxpayers have an allowance of £500.

But cash ISAs can still be worthwhile – the main reason being that the tax breaks are cumulative. When you keep earning interest upon interest already earned, you can build up quite a substantial nest egg.

Who can have a cash ISA?

Any UK resident aged 16 or over can open a cash ISA. For children under 16, Junior ISAs are available. Most banks and building societies provide a range of cash ISAs, often with different interest rates. 

You can have more than one ISA, but you can only pay into one cash ISA in each tax year.

How much money can I put in a cash ISA?

Each year the Government sets an annual limit for how much can be deposited in an ISA. For the tax year 2019/20 (which runs from April 6 to April 5), the threshold is £20,000.

You can invest the full amount in cash if you want or split your allowance with a stocks and shares ISA, Lifetime ISA (if you’re under 40) and Innovative Finance ISA.

If you don’t use your full ISA allowance in one year, it can’t be rolled over to the next tax year.

Are there different types of cash ISA?

There are two main types of cash ISA – easy access and fixed rate:

  • Easy access cash ISAs: These are the most straightforward cash ISAs as you can access your money when you want. They usually pay a variable rate of interest, so the rate you get could go up or down depending on how well the economy is performing.
  • Fixed-rate ISAs: Some ISAs pay a fixed rate of interest for a set term, such as 1.8% for 3 years. Terms usually range from 1 to 5 years, with the highest interest paid on the longest-term accounts. Fixed-rate ISAs tend to pay higher interest than variable ones because providers have a guarantee they will have your money for a certain amount of time. You have to be prepared to lock your money away for at least a year as there’s usually a penalty for early withdrawal. 

Can I withdraw money from a cash ISA?

If you have an easy access ISA, you can usually withdraw money when you want, but it’s always best to check the terms and conditions with your provider first. Withdrawals from fixed-term ISAs are not usually allowed without paying a penalty.

If you have a flexible cash ISA and you do decide to take money out, it can be replaced the same tax year without this affecting your annual ISA allowance.

Can I transfer my cash ISA to another provider?

Yes. If you find another ISA that is offering a better interest rate, or you want to move cash into a stocks and shares ISA, you can switch to another supplier. Make sure your new provider will let you transfer your ISA though because some won’t.

If they will, ask your new provider to arrange the transfer rather than withdrawing the cash yourself from your old ISA and putting it into a new one. If you withdraw cash from an ISA, it loses its tax-free benefits.

 

 

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Important

Please remember the value of your investment and any income from it may fall as well as rise and is not guaranteed. You may get back less than you invest . Tax rules for ISAs may change in the future and their tax advantages depend on your individual circumstances.

Please note the information, data and any references in this article were accurate at the time of writing. Please check the date of the content if you’re looking for up to date investment commentary or tax-year related information.