If you are worried about having to 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.
A cash ISA – short for individual savings account – is an account that pays interest tax-free, as opposed to non-ISA savings accounts (such as fixed rate bonds, notice savings accounts and easy access savers) on which you may pay tax. As with ‘normal’ savings accounts, there are different versions available, which may have variable or fixed interest rates.
While there are many similarities between cash ISAs and savings accounts, the key difference, aside from taxation, is the amount you can pay into them. Unlike savings accounts, which allow you to deposit as much as the provider deems appropriate, there is a general yearly limit on the amount you will be allowed to place into ISAs.
Each tax year (which runs from 6 April to the following 5 April) 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 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 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 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.
£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 £4,368 in the 2019/20 tax year 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 and 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 lose it, as you can't carry it over.
Don’t forget, only a certain amount of your savings will be protected per banking institution in the case of a provider’s bankruptcy. While the ISA allowance means you won’t have to worry about this straightaway, you could amass a large enough pot over the years for this to be a concern. Read more about depositor protection schemes in our guide on the topic.
You can only put your ISA allowance’s worth of cash into one of each type of ISA per tax year, which means you can either open a new cash ISA or add another £20,000 to an existing cash ISA, but not both. The exception to this is when a provider allows you to share the allowance across its ISA range, in which case you can open a cash ISA and add to an existing Help to Buy ISA with the same provider in the same year, for instance.
Once you have an ISA, you’ll be able to transfer the funds to a new account whenever you want, as long as the provider allows this without penalty or notice, you follow the correct procedures and you don’t try to add new funds as well. This means you won’t have to stay with the same provider if you can find a better rate elsewhere.
Note that if you want to transfer funds within the first year of opening the account, you’ll have to transfer the full amount. Remember that as you can pay into one of each type of ISA per tax year, you could open a cash ISA, stocks & shares ISA, innovative finance ISA and Lifetime ISA at the same time.
Since April 2016 you can withdraw and replace money from your ISA without this affecting your ISA allowance, which means the ISA allowance limit now applies only to 'new money' added into the account. For example:
Not all ISA providers will be offering this level of flexibility, so if this is likely to be important to you, you'll need to check with them before investing.
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 in our separate guide on the topic.
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.