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Cash ISAs

Written by Sebastian Anthony

Cash ISAs are a tax-free way of building up your savings. Each year you can put some of your income into a cash ISA and the interest you earn is completely tax free, irrespective of your income tax bracket and financial situation.

What is a cash ISA?

A cash ISA is very similar to an instant access savings bank account except you will never be taxed on the interest earned by your ISA. Over time, if you have a large amount saved in ISAs, you could generate a lot of tax-free income.

Which type of cash ISA should you choose?

There are 2 main things to consider when picking a cash ISA: the interest rate, and how easy it is to withdraw your money when you need it. There are lots of cash ISA providers and accounts but the best cash ISA for you will depend on what you’re looking for in a savings account - do you need instant access to your money, for example, or are you happier keeping it locked away for longer? To compare cash ISA rates a comparison website is a quick way to show you a range of different accounts to open.

  • Instant access means you can withdraw your money at any time

  • Easy access lets you withdraw at any time, but you might have to wait a few days for the cash to actually arrive in your bank account

  • Some ISAs have a notice period, meaning you have to notify the provider ahead of time that you want to withdraw your funds, otherwise you might be charged or penalised some of the interest

  • Regular saver means you have to deposit a certain amount of money every month to qualify for the interest rate

  • Many of the best-interest-rate cash ISAs are fixed term – you put your money in and then you can’t touch it for the fixed-term period, usually 1 to 5 years. (Some fixed-term ISAs will let you withdraw cash but you’ll usually be smacked with a large interest penalty)

What is your personal savings allowance?

As of the 2020/2021 tax year, you have a personal savings allowance (PSA), which was introduced in 2016. It lets some people earn tax-free interest on savings that are not stored in an ISA.

If you’re a basic-rate taxpayer (20%), you don’t pay any tax on the first £1,000 in interest. Higher-rate (40% or 41% in Scotland) taxpayers don’t pay tax on the first £500. And additional rate taxpayers (45%) get no personal savings allowance at all.

Your ISA allowance is completely separate from your PSA: everyone gets the full £20,000-per-year ISA allowance, irrespective of income tax brackets.

How much can you pay into a cash ISA?

Your annual ISA allowance or limit is £20,000, which can be spread across a cash ISA, stocks and shares ISA, innovative finance ISA, and lifetime ISA. The allowance resets every tax year (April 5), and any unused allowance from the previous year doesn’t roll over.

Some ISAs have a minimum initial deposit, while some only need £1 or even nothing at all. Some providers will let you transfer an existing ISA into a cash ISA without using up any more of this year’s ISA allowance, too.

Can I have an ISA if I have bad credit?

Yep – you don’t need to pass a credit check to open a savings account.

Is my money safe in an ISA?

Yes – as long as your ISA provider is backed by the FSCS (financial services compensation scheme), which protects up to £85,000 of your money per bank/provider/institution.

Can you take your money out of an ISA and put it back in?

Some ISAs will let you withdraw some money and replace it within the same tax year without taking a second bite out of your £20,000 allowance. Depending on the details of your ISA, though, there may be significant charges and penalties for withdrawing cash.


How many cash ISAs can I have?

The number of cash ISAs you can hold is only limited by the number of years you have been investing in an ISA. You can only pay into one cash ISA per tax year, but you can start a new one every year.

Can I transfer my cash ISA?

Yes, ISAs are transferable products and to make sure your money is in the best cash ISA for you, it may be worth opening a new one. However, you’ll need to ensure that the ISA you want to switch to accepts transfers – not all do. Assuming you’ve found an ISA you want to transfer to, you’ll need to complete some straightforward paperwork, and your bank will process the transfer on your behalf. Do not withdraw the money yourself and try to pay it into the new ISA.

Can you get joint cash ISAs?

No. ISAs are ‘individual savings accounts’ intended for the exclusive use of one person.

Can I transfer my ISA to someone else?

No. The money in your ISA has been built up using your personal tax-free allowance, and this cannot be transferred to another person. If you wish to gift another person money you have saved in your ISA, you will need to withdraw it and transfer it to them directly.

What happens to the money in my ISA if I die?

Standard rules of inheritance apply to ISAs. So, if you’re married or in a civil partnership, they will inherit your ISA. If not, your ISA account will be closed, and any money it contains will form part of your estate.

Do I need a credit check to get a cash ISA?

No. ISAs are just an efficient vehicle for savings. Credit is not available through them, so no credit checks are required.

What happens if I exceed my annual ISA allowance?

In theory, your ISA provider should reject any deposit which will result in you exceeding your annual ISA allowance. If this does not happen, HMRC, which can track your annual ISA deposits via your National Insurance number, will alert you. Naturally, excess payments will not gain tax-free status, and HMRC will confirm the steps you must take to remedy the situation.

6 November 2020