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What is a cash ISA?

Category: ISAs
Author: Tim Leonard
Updated: 05/04/2019

If you pay tax on your savings interest, a cash ISA can be a great home for your savings.

That's because interest earned on a cash ISA is paid 100% tax-free, whereas any interest you earn over your Personal Savings Allowance is taxable at your normal tax rate.

What is a cash ISA?

A cash ISA - or individual savings account - is basically an account that pays interest tax-free, as opposed to savings accounts on which you may pay tax (such as fixed rate bonds, notice savings accounts and easy access versions).

Although in terms of features there isn't much difference between cash ISAs and savings accounts, there is a key difference in the amount you can pay into a cash ISA. This is limited to a maximum allowance in any tax year.

What is a cash ISA allowance?

Each tax year you get a fresh ISA allowance. In the 2019/20 tax year you have an ISA allowance of £20,000, which can be held in cash, in an innovative finance ISA or in a stocks & shares ISA in any combination you wish. You can also use up to £4,000 of your allowance to invest in a Lifetime ISA to save for a first home or towards retirement.

These are your options:

£20,000 invested entirely in a stocks & shares ISA. You do not have to put any of your ISA allowance in a cash or innovative finance ISA.

£20,000 invested entirely in a cash ISA. You do not have to put any of your ISA allowance in a stocks & shares or innovative finance ISA.

£20,000 invested entirely in an innovative finance ISA. You do not have to put any of your ISA allowance in a stocks & shares or cash ISA.

The full £20,000 allowance split between the three, however you like.

For example:

£10,000 in a cash ISA, £10,000 in a stocks & shares version.

£6,000 in a cash ISA, £14,000 in a stocks & shares ISA.

£7,000 in a cash ISA, £7,000 in a stocks & shares ISA, £6,000 in an innovative finance ISA.

£4,000 in a lifetime ISA, £16,000 in a cash ISA.

Every UK resident over the age of 16 has the same cash ISA allowance. Young adults aged 16 and 17 have an additional Junior ISA limit of £4,260 as well as the adult ISA allowance, however they cannot invest into a stocks & shares ISA or an innovative finance ISA until the age of 18.

The allowance is an individual limit – an ISA can only be held in a single name, and you can only pay into one of each ISA type per tax year. For instance, a husband and wife get an ISA allowance each, but must hold separate ISA accounts. Joint ISAs aren't an option.

If you don't use your full ISA allowance by the end of the tax year (5 April), you have lost it – you can't carry it over.

Making withdrawals from a cash ISA

So, your cash ISA allowance is simply the amount of new money you are allowed to pay into a cash ISA in a given tax year. From April 2016 you can withdraw and replace money from your ISA without this affecting your ISA allowance. The limit applies to 'new money' added into the account. For example:

  • If you fully subscribe the ISA with £20,000 on 6 April you can then withdraw, say, £15,000 at a later date, and replace that £15,000 in the same tax year without breaching your ISA allowance.

  • But, if you made the same subscription, withdrew the £15,000 and then added a further £17,000 back in instead, this would breach the ISA limit by £2,000 so wouldn't be accepted as part of your tax-free allowance.

Not all ISA providers will be offering this level of flexibility in their ISAs, so if this is likely to be important to you, you'll need to check with them before investing.

Cash ISAs can be transferred

You can transfer a cash ISA whenever you want. However, there's a special process to follow. Some cash ISAs (particularly fixed rate versions) may charge an interest penalty when you transfer out, and if you're transferring ISA money that you've paid in this tax year, the whole lot must be transferred to the new account. Cash ISAs can be transferred to other cash ISAs or to stocks & shares ISAs, or vice versa, however not all providers will allow transfers in of previous ISA pots.

Read more about ISA transfers

What next?

Download a FREE NISA guide from Hargreaves Lansdown

Compare the best ISA rates

Tax-efficient investment opportunities for your ISA Allowance - stocks & shares ISAs

Want to decide for yourself which savings account is the best? Use our whole of market savings search

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.