If you’re looking for a dependable way to help your hard-earned savings grow, now could be the ideal time to open a Cash ISA and take advantage of the tax-free benefits on offer.
If you don’t know much about Cash ISAs or you’re not sure if they’re quite right for you - don’t worry, they’re not as complex as you might think. We’ve answered nine commonly asked questions, explaining how they could help boost your savings.
What is a Cash ISA?
An Individual Savings Account, or ISA as they’re more commonly known, is a savings account where you don’t pay tax on any interest you earn. So, if you’re currently paying tax on your savings in a standard account, an ISA could be a great way to make the most of your money.
There are many different types of ISA, including Stocks and Shares, Help to Buy, Innovative Finance and Lifetime accounts, with one of the most popular being a Cash ISA.
Make sure you investigate all of your options before deciding which would work best for you.
How much can I save?
Each year the government sets out your annual ISA allowance, which is the maximum amount of money you can pay into an ISA in that tax year.
The allowance for this tax year is £20,000, meaning you can deposit up to that amount in your Cash ISA without having to pay tax on the interest you earn.
Are Cash ISAs worthwhile?
As well as being able to save up to £20,000 tax-free, any interest you earn with a Cash ISA won’t count towards your Personal Savings Allowance.
The Personal Savings Allowance means that basic rate taxpayers can earn up to £1,000 in interest from current accounts, savings accounts, fixed rate bonds or any account where they earn interest. For higher rate taxpayers the allowance covers up to £500 of interest, but those classed as additional rate taxpayers are not entitled to a Personal Savings Allowance.
Simply put, a Cash ISA doesn’t stop you from earning interest in other types of savings account, and if you’re already earning more interest than your Allowance, transferring some of your money into a Cash ISA leaves you free to continue to grow your savings without incurring any additional tax.
What are the different types of Cash ISA?
Cash ISAs come in a range of different shapes and sizes, and so you’ll want to make sure the account you pick is right for your needs.
Here’s a roundup of the most common types, including the benefits of each type of account:
- Easy Access – with an Easy Access Cash ISA you’re free to make deposits whenever you want, and make withdrawals to suit. Just be aware that any money you withdraw will count towards your annual ISA allowance and you won’t be able to replace it once it’s gone.
- Notice – with a Notice Cash ISA you can earn a higher rate of interest than with an Easy Access account and you’ll still be able to make deposits whenever you want. To withdraw your money, just give the agreed amount of notice and the money will be made available to you.
- Fixed Rate – If you don’t need access to your money, a Fixed Rate Cash ISA is ideal for growing your tax-free savings. You’ll get a fixed rate of interest paid tax-free for a set period of time, and you can relax knowing what interest your savings are earning.
- Flexible – With a Flexible ISA you’re able to withdraw and replace your savings as many times as you like as long as you don’t exceed your annual ISA allowance in each tax year. You can even withdraw funds deposited in previous tax years, as long as the money you take out is replaced within the same tax year.
How many Cash ISAs can I have?
Usually you can only open one Cash ISA in each tax year, and you cannot pay into more than one in the same year.
However, some providers allow you to spread your annual allowance across several different types of Cash ISA, giving a choice of interest rates and access options to suit your needs, rather than tying you in to a one-size-fits-all account.
For example, you could open an Easy Access Cash ISA with £5,000, which you can access easily if you need to, and also deposit £10,000 into a Fixed Rate Cash ISA which will usually earn a higher rate of interest - in exchange for the higher rate, your savings will be locked away for a fixed term.
You could deposit the remaining £5,000 of your allowance into a Notice Cash ISA, which gives you access to your savings (after giving the required amount of notice) together with a higher interest rate than an Easy Access account – giving you a combination of access with rate.
You should always check the conditions of your account before making a withdrawal.
Do I have to pay in all of my savings at the same time?
It all depends on which type of Cash ISA you choose.
With most Easy Access and Notice Cash ISAs, you can add to your savings at any time. So, if you’ve got a lump sum to deposit that’s fine, you can pay up to the maximum allowance in one go.
Or, if you’d rather put money away every now and again, or set up a regular standing order to your account, that’s fine too.
With a Fixed Rate ISA it’s a little different, the majority of accounts will only allow you to make deposits during a limited funding window when you first open your account, after which you’re not able to make additional deposits.
For all types of Cash ISAs, the first deposit will usually need to be equal to the minimum balance applicable to each account, after which any future deposits can be varied amounts depending on the amount you have available to save.
Can I transfer my existing Cash ISA?
Many Cash ISA providers will allow you to transfer money to them from another provider, and can arrange the transfer on your behalf.
However, it’s very important that you check the terms of your existing account before arranging a transfer, as there may be notice periods or charges that apply.
If you transfer your savings without giving the required notice, or during a fixed rate period, you may be subject to a charge by way of a loss of interest on the amount transferred.
Always check with your existing ISA provider before making a transfer, and also let your new provider arrange the transfer to avoid losing any tax benefits for the amount you withdraw.
Can anyone open a Cash ISA?
You can open a Cash ISA as long as you’re aged over 16 (although some providers only accept savers who are 18 and over) and you haven’t subscribed to another ISA in the same tax year (unless you’re using a Mix and Match ISA to spread your allowance over more than one account).
You can only open an account in your own name - joint accounts are not possible as it’s an individual savings account; and you’re not able to open them on behalf of anybody else either.
Are Cash ISAs protected?
Yes. All eligible deposits in UK savings accounts (including Cash ISAs) are protected up to a total of £85,000 by the Financial Services Compensation Scheme (FSCS), the UK’s deposit protection scheme. Any savings held above this limit are unlikely to be covered.
You should always check if your Cash ISA provider shares its FSCS cover with another institution as several providers could be owned by the same bank, meaning that even if you spread your savings across more than one provider you could only be protected for a total of £85,000 (not £85,000 per provider).
Visit fscs.org.uk for more information on the Financial Services Compensation Scheme.