Cash ISAs are one of the most popular ways to save, and with the interest that you earn in these accounts paid tax-free, it is easy to see why.
That ISAs are accessible to almost all has also played a key part in their success. Anyone who is resident in the UK for tax purposes and aged 16 or over is entitled to open a cash ISA. The age rises to 18 for a stocks & shares ISA. Crown employees, such as diplomats or members of the armed forces, are eligible too, along with their spouses or civil partners.
If you are looking to save for a child, Junior ISAs are available that also pay interest tax-free.
The main advantage of a cash ISA is its tax-free status, with returns and capital growth free from income and capital gains tax. This is important because the interest you earn from a traditional savings account may be subject to income tax; so, depending on how much savings interest you earn, up to 45% of this may be taxable.
Since the introduction of the Personal Savings Allowance in April 2016, which allows basic rate taxpayers to earn £1,000 of savings income tax-free (£500 for higher rate taxpayers), questions have been raised over the value of using an ISA for savings.
However, for the vast majority of savers, making use of their ISA allowance still makes sense. This is because:
Cash ISAs tend to work in the same way as any other savings account. However, there are a few important rules to be aware of.
How much can I put into a cash ISA?
Because of their tax advantages, the Government limits the amount that one person can pay into an ISA each tax year. A tax year runs from 6 April to 5 April the following year.
2019/20 ISA allowance
In the 2019/20 tax year, the ISA allowance is £20,000. You can choose to use your ISA allowance in a cash ISA, a stocks & shares ISA, an innovative finance ISA, a lifetime ISA (which has a lower limit of £4,000) or any combination of the four, as long as you don't exceed the annual allowance. This means that the most you can pay into a cash ISA in any tax year is £20,000; if you do this, you will not be able to put any money into any of the other types of ISA.
You must pay your money in before 5 April 2020 if it is to count towards the annual ISA limit for the 2019/20 tax year.
Can I have more than one ISA?
However, what you can’t do is put new money into more than one of the same type of ISA in the same tax year. So, if you have already opened a cash ISA after 6 April of the current year, and have made contributions into it, you cannot open another cash ISA and pay into it until the next tax year.
Can I withdraw cash whenever I like?
This is likely to depend on the type of cash ISA you have and any rules that your ISA provider has for making withdrawals. With easy access cash ISAs, you can usually withdraw your money when you want to. However, with fixed rate cash ISAs, your funds are supposed to be tied up until the end of the fixed term.
In reality, most fixed rate ISAs will allow early access to funds, but an interest penalty will have to be paid. Similarly, while a notice period is meant to be observed if you have a notice ISA, some providers will allow earlier withdrawals on an interest penalty.
Can I take money out of a cash ISA and put it back in?
If your ISA is ‘flexible’, you can take out money then replace it during the same tax year without reducing your current year’s allowance. It should be noted, however, that ISA providers do not have to offer the ‘flexible ISA’ option, so you should always check with your provider first.
Inheriting cash ISAs
It is now possible for a surviving spouse or civil partner to inherit the ISA savings of a loved one when they die and continue to benefit from the tax-free benefits built up. This can be done using an additional, one-off ISA allowance, equal to the value of the deceased’s ISA holdings.
The ‘additional permitted subscription’ allows the survivor to re-shelter the assets in an ISA in their own name, without encroaching on their own ISA allowance for that tax year. Although inheritance tax (IHT) will still apply, transfers between spouses on death are IHT free.
Is my money safe in a cash ISA?
As long as the ISA is provided by a UK regulated bank or building society account, it is protected under the Financial Services Compensation Scheme (FSCS). This means that the first £85,000 of money saved with a particular financial institution is covered should the ISA provider fail.
If you have built up a total cash ISA fund in excess of £85,000, you may want to think about spreading the money between different providers.
There is a wide variety of cash ISAs on offer, which mainly mirror the types of account on offer in the traditional savings market.
Easy access cash ISAs
Easy access cash ISAs are probably the simplest type of cash ISA, as they allow instant access to your funds. While most easy access ISAs allow unlimited withdrawals, it’s worth noting that some restrict the number of withdrawals that are allowed.
Some easy access ISAs also include a short-term bonus which boosts their rate, usually for 12 months. Once the bonus period expires, it is important to check whether the ISA remains competitive, and potentially transfer your ISA if it does not.
See the top easy access ISAs
Fixed rate ISAs
Fixed rate ISAs tend to pay the best interest rates because providers are happy to pay more in return for knowing they will have the funds for a set amount of time. Terms usually range from one to five years, with the longer the term agreed, the higher the rate of interest that is paid. However, if you want to access your fixed rate ISA funds before the term expires, an interest penalty will normally have to be paid and the ISA may be closed.
See the top fixed rate ISAs
Regular savings ISAs
If you want to put a smaller amount away each month, a regular saving ISA may be for you. In return for promising to put a minimum amount of money away on a regular basis, these accounts often pay a higher amount of interest. It should be noted, however, that missing a month or withdrawing the cash usually means the better rate will be lost.
At the moment, there are a limited number of regular savings ISAs available. Use the savings search to find accounts that allow you to put cash away on a monthly basis, which includes regular savings ISAs.
If you are happy to give notice before accessing your ISA funds, notice ISAs tend to pay a higher rate of interest than easy access ISAs. Notice periods vary, but typically range between 30 and 180 days. Interest penalties for earlier withdrawals usually fall in line with the notice period.
You can transfer your existing cash ISA without losing its tax-free privileges. The two main reasons you are likely to do this are:
How the ISA transfer process works
ISA transfer rules
If you are thinking of transferring your ISA, make sure you consider the following first:
How long does it take to transfer a cash ISA to another provider?
Under current rules, cash ISA transfers should take no longer than 15 working days. If your transfer takes longer than this, you should contact your new ISA provider.
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.