Felicity Hannah
Sam Bromley
There are a number of different kinds of individual savings accounts (ISAs), but a popular one is the cash ISA.
If you’re not sure which kind of ISA you want to put your money into, read our guide to all ISAs.
If you’ve already decided that a cash ISA is the right for you, there are a few things it’s worth knowing to make sure you choose the best account for you.
What is a cash ISA?
A cash ISA is the same as any other savings account except the interest you earn is not subject to tax.
It really is that simple. It doesn’t require you to do anything differently or start filing a tax return or consult an accountant – your returns are protected from tax for as long as you hold the money in the account.
Every UK resident adult is allowed to save up to £20,000 each tax year into ISAs. This can be saved in any way you like – split across different types of ISAs or all saved in one.
If you’re going with a cash ISA, there is still another decision to make – just like non-ISA savings accounts, there are different options to choose from.
Which cash ISA is right for me?
There are five main cash ISA accounts to consider.
1. Easy access ISA
An easy access ISA allows you to take your money out with no notice or penalties. This account could be good if you think you might need your money in a hurry.
However, they usually pay lower rates of interest. Generally, the more willing you are to accept restrictions on your account, the higher rate of interest you can earn.
2. Fixed-rate cash ISA
If you want to earn a higher rate of interest and don’t mind locking your money away for a period, a fixed-rate cash ISA might be right for you. With this account you agree to a term of perhaps between one and five years, and again, generally, the longer the term, the higher the interest rate you get.
These accounts are not risk free: it can be difficult to get your money in an emergency, and you may have to pay a penalty to do so. There’s also the risk that interest rates will rise during the fixed term and leave you locked in an uncompetitive deal.
3. Notice cash ISA
A slightly less restrictive alternative is a notice cash ISA, where you usually can make unlimited deposits and withdraw your money after giving some notice. Your notice period can be anything from seven to 120 days. Check your provider’s specific rules, though.
4. Regular saver ISA
A regular saver ISA requires you to save a minimum amount of money each month, and some cap the amount you can pay in. These accounts may offer a higher rate of interest than an easy access deal, but be sure you can make the deposits each month or you risk losing that higher rate.
5. Lifetime ISA
If you want to buy a house or save for later life, you may decide that a Lifetime ISA is for you. These accounts are available to any UK resident aged between 18 and 39, and come with the government topping up your savings with a 25% bonus. Your contributions to this type of account are limited to £4,000 a year.
Again, it’s important to understand the restrictions. The money is meant for purchasing a first home or to use once you reach age 60. If you want your money sooner or for a different purpose, you will pay a 25% penalty.
Do I need a cash ISA?
Since the personal savings allowance was launched in 2016, basic-rate taxpayers can earn up to £1,000 in savings income without paying tax on the amount earned.
If you are in a position to save that much money, you could maximise both your ISA allowance and personal savings allowance to earn tax-free income on your savings.
And keep in mind that with an ISA, your money is future-proofed against tax. For example, interest rates have increased in the last few years, meaning that people have found it easier to breach their personal savings allowance when using regular accounts. Saving in a tax-free wrapper like an ISA protects the income earned, and future growth, from tax.
Having said that, sometimes other savings accounts offer higher interest rates, so you will need to crunch the numbers to decide whether an ISA is right for you.
» MORE: Is an ISA or savings account best for me?
How many cash ISAs can I have?
Rules introduced on 6 April 2024 mean that you can open and pay into as many ISAs of each type as you like every tax year, as long as you don’t go over your ISA allowance. Previously, you could only pay into one ISA of each type every tax year.
This means that you can hold and pay into multiple cash ISAs.
Keep in mind however that it’s still not possible to pay into more than one Lifetime ISA and one Junior ISA each tax year.
Can I withdraw from a cash ISA?
With some ISA providers you can only use your allowance once. So if you paid in your money and then withdrew it, you can’t re-use that share of your ISA allowance. Depending on how much you have saved already, that may mean you have to wait until the start of the new tax year, when your allowance resets.
However, some ISA providers and certain ISA types allow you to withdraw the money and replace it without affecting your allowance, as long as you do so in the same tax year. Check the fine print for the rules.
Is my money protected with a cash ISA?
Under the Financial Services Compensation Scheme, your money saved in a cash ISA is protected up to £85,000.
How do I get a cash ISA?
It is a good idea to compare cash ISA rates and providers and then apply to the one that’s right for you, rather than simply opening an account with your main bank. There can be a real difference in the service and rates between providers, so it’s important to shop around.
Once you have compared rates online, most banks and building societies allow you to apply online. You will need to have all your details handy, including your National Insurance number.
If you want to transfer savings from an old account into a new ISA, it’s important to follow the correct process and ask your new provider to do the transfer for you. If you simply withdraw the money and pay it in, your savings will lose their tax-free status and you will start eating into this year’s allowance unnecessarily.
WARNING: We cannot tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk and you may get back less than you originally paid in.
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