In this section:
What is a cash ISA?
A cash ISA (Individual Savings Account) is a savings account where the interest you earn on your savings is not taxed.
Each of us has an individual ISA allowance of £20,000 per year (tax year 2020-21). This means that you can’t deposit more than £20,000 into your ISA during the tax year. However, your ISA allowance will renew once a new tax year begins.
You can only pay into one cash ISA each year. But your ISA allowance can be split across different types of ISA. For example, you could pay some into a cash ISA, some into a stocks and shares ISA and some into an innovative finance ISA.
What are the benefits of a cash ISA?
The benefits of a cash ISA are not as obvious as they once were. Prior to April 2016, any interest you earned on a savings account that wasn’t an ISA would be subject to income tax. However, since the introduction of the personal savings allowance, basic rate taxpayers can now receive up to £1,000 a year in interest tax-free, while higher rate taxpayers can earn up to £500 a year in interest tax-free. Additional rate taxpayers do not qualify for a personal savings allowance.
While having a cash ISA may not seem as important as it once was, its tax-free savings status is still a huge benefit for the following reasons:
1. The benefits of a cash ISA are largely cumulative. Because you have the ability to transfer from one ISA to another without having to pay income tax on your interest earnings, you are able to shelter ever larger sums from tax year-on-year.
2. If you are an additional rate taxpayer, you won’t qualify for a personal savings allowance. So depositing your money into a cash ISA is one way of shielding any interest earned from tax.
3. While interest rates are relatively low, a cash ISA may not seem like a necessity. But if interest rates were to rise, you could find that your interest returns on other savings accounts start to creep above your personal savings allowance. In which case, a cash ISA would then make sense.
4. The ISA scheme is more established than that of the personal savings allowance. So if the government was to change the way savings are taxed in the future, it would be hard for them to justify the removal of tax advantages already held in ISAs. It is more likely they would reduce, or even scrap, the personal savings allowance.
Are there different types of cash ISA?
As with other savings accounts, there are different types of cash ISA available:
Easy access – An easy access ISA allows you to access your money whenever you need to. Some easy access ISAs have a set number of withdrawals a year, but for the most part you won’t be penalised for accessing your account. You can also make as many deposits during the year as you like, as long as you don’t go over your ISA allowance.
Regular saver – A regular saver ISA offers a fixed rate of interest as long as you make a deposit each month. This type of ISA usually lasts for 12 months, and typically you can’t access your money during this time.
Notice – A notice cash ISA will require you to tell your bank or building society when you want to withdraw money in advance. It tends to pay a higher rate of interest than an easy access ISA, but you could be penalised if you withdraw money without notice.
Fixed term – A fixed term ISA keeps your money locked away for the whole term, typically one to five years. You will receive a fixed rate of interest, but you won’t be able to access your money during the term without being penalised.
Junior – A junior ISA allows you to deposit up to £9,000 a year (tax year 2020/21) tax-free for your child, as long as they are under 18 and living in the UK. A junior ISA will become an adult ISA when your child turns 18.
Lifetime – A lifetime ISA is an ISA which was created to help people save for their first home or for their retirement. You can save up to £4,000 in a lifetime ISA each year, and the government will give you a bonus worth 25% of what you pay in every tax year.
How can you transfer a cash ISA?
As mentioned, one of the big benefits of a cash ISA is the ability to transfer your savings to a new ISA each tax-year. This enables you to continue to shield your interest earnings from tax, and allows you to find a more favourable rate each year. You may also find that over time you will accumulate several cash ISAs and want to transfer them into one account to make managing them easier. However, not all cash ISAs allow transfers, so it is best to check whether yours does.
One important thing to be aware of is that money in a cash ISA needs to be transferred in a specific way; otherwise, it could lose its tax-free status. It’s not just a case of withdrawing cash and then depositing it in the new account. Similarly, if you do ever need to withdraw money from your ISA but replace it further down the line, you may find that you use a portion of your ISA allowance by doing so.
Also, how you transfer your money will depend on what type of cash ISA you have. If you have a notice or fixed-term account, you may be penalised if you try a transfer before the end of the term or do not observe the correct notice period.
Cash ISA transfers are made electronically using a transfer form given to you by your new ISA provider. The transfer typically takes up to 15 working days to be completed. Some providers will then backdate your interest to the day you started your ISA application, but make sure to ask about this before you apply.
Can you have multiple cash ISAs?
Yes and no. The important thing to understand is that you can only pay into one cash ISA during the tax year.
But you can have existing cash ISAs from previous years. So yes, you can have multiple cash ISAs, but your tax-free cash ISA allowance won’t increase as a result. You will still only be able to deposit into one of them each year.
While you may be only able to pay into one cash ISA a year, you are allowed to spread your ISA allowance between a stocks and shares ISA and/or an innovative finance ISA. However, it is important to note that the ISA allowance remains the same regardless of the number of ISAs you have.
A stocks and shares ISA gives you tax benefits on capital gains made from financial investments. It is important to be aware that this is an investment product, so you may get less back than you invest.
An innovative finance ISA provides tax benefits on capital gains from crowdfunding or peer-to-peer investment. This type of ISA is not covered by the Financial Services Compensation Scheme (FSCS).
Are my savings protected in a cash ISA?
As a cash ISA is a savings account, it is protected by the FSCS. Being covered by the FSCS means that savings up to £85,000 are protected if the financial institution providing the ISA fails.
It is important to note that this is £85,000 per financial institution. So you could have multiple cash ISAs with different banks, and as long as you do not exceed the £85,000 threshold with any one bank, your money will be protected.
Just a note in case you decide to spread your ISA allowance over different ISA types: an innovative finance ISA is not protected by the FSCS, but a stocks and shares ISA is.
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