What is a cash ISA?
A cash Individual Savings Account (ISA) is a tax-free savings account which allows you to save up to a set amount of money per financial year without paying any tax on it. The cash ISA limit currently stands at £15,240 per person and you need to be a UK resident or Crown employee aged 16 or over to open an account. You can only have one cash ISA per tax year, but you can also have a different type of ISA, known as a stocks and shares ISA, simultaneously.
Benefits of a cash ISA
There are several key benefits to a cash ISA:
- No income tax - you don't pay tax on any interest you earn from the cash in your ISA
- Easy access - if you choose an instant access cash ISA (rather than a fixed-rate cash ISA) it's a convenient way to save at a good interest rate while retaining fast and easy access to your money, should you need it
- No need to declare - you don't need to declare your cash ISA on your tax return
- Straightforward transfers - you can transfer your cash ISA to a different provider to get a better rate of interest.
How much tax can I save with a cash ISA?
The good news is that whatever your tax bracket, you'll pay 0% tax on any savings held in a cash ISA. Compare this to the usual tax rates on savings:
- Saving rate taxpayers - you would usually pay 10% tax on interest earned from your savings. In a cash ISA this savings interest is tax-free
- Basic rate taxpayers - you would usually pay 20% tax on interest earned from savings. In a cash ISA this savings interest is tax-free
- Higher rate taxpayers - you would usually pay 40% tax on interest earned from savings. In a cash ISA this savings interest is tax-free
- Additional higher rate taxpayers - you would usually pay 50% tax on interest earned from savings. In a cash ISA this savings interest is tax-free.
Choosing the best cash ISA deal for you
There are several factors to consider when choosing a cash ISA:
- Do you want easy access to your money? An instant access ISA might be the right choice for you, as long as you're willing to accept a slightly lower rate of interest
- Are you happy to lock away cash for a set period of time? Fixed-rate cash ISAs might be a better option as they have the potential to offer a greater return long-term
- Do you have a lump sum to invest, or are you planning to make small regular payments? Different ISA providers offer different minimum deposits ranging from just one pound to several thousand pounds
There is no single 'right' cash ISA choice for everyone - it's a case of weighing up the different factors and considering which product and provider best meets your overall needs.
Can I transfer my cash ISA to a new provider for a better deal?
You are free to transfer your cash ISA at any time, making it easy to move your money around providers and ensure the most competitive rates. But remember that if you withdraw your cash and then open another ISA, you will lose all your tax-free benefits. To transfer an ISA without losing any tax benefits, ask your new ISA provider to arrange the transfer of funds on your behalf.
Getting the most from your cash ISA allowance
To help you make the most of your ISA allowance in 2016, keep these tips in mind:
- You can only have one type of cash ISA in each financial year, so research your options carefully. Whether you choose a fixed-rate or instant access cash ISA, give some thought to your savings goals beforehand to help you determine what's right for you
- Remember that you can't carry your tax-free allowance over from one financial year to the next - so if you've got enough cash to hit your limit, stash it in an ISA. The cash ISA allowance for the financial year 2015/16 is £15,240.
- Because a cash ISA operates on a year-long basis, it's a good way to try your hand at saving without committing yourself to anything long-term. It's also a great way to save for a specific event like a wedding, holiday, or starting a family
- Once you've set up your cash ISA, make sure you still keep an eye on the interest rates available from other providers. You can usually switch cash ISA providers without incurring any charge
- To make life easier, set up a direct transfer from your current account into your cash ISA to make sure that you put aside a certain amount each month without fail
- Don't forget that you've got the option of opening a stocks and shares ISA, too. For more on this, see our page on stocks and shares ISAs.
Use our comparison tables for the latest cash ISA rates