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.
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.
There are two 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.
“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 one to five years. (Some fixed-term ISAs will let you withdraw cash but you’ll usually be smacked with a large interest penalty.)
As of the 2019/2020 tax year you now have a personal savings allowance (PSA), which lets some people earn tax-free interest on savings that are not stored in an ISA. If you’re a basic-rate tax payer (20%), you don’t pay any tax on the first £1,000 in interest. Higher-rate (40% or 41% in Scotland) tax payers don’t pay tax on the first £500. And additional rate tax payers (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.
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 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.
Yep – you don’t need to pass a credit check to open a savings account.
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.
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.
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.
Yes, ISAs are transferable products. 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.
No. ISAs are ‘individual savings accounts’ intended for the exclusive use of one person.
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.
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.
No. ISAs are just an efficient vehicle for savings. Credit is not available through them, so no credit checks are required.
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.