Cash ISA Guide
What are cash ISAs?
Death and taxes are famously the only two real certainties in life. However, you can avoid paying tax on at least some of your savings by choosing a cash individual savings account (ISA) rather than a standard account.
Tax-free cash ISAs are available from most banks and building societies and are open to all UK residents over the age of 16.
There are limits on the amount you can pay in each year. This tax year, for example, the total ISA allowance per adult is £11,520.
However, you can only put up to £5,760 into a cash ISA. If you want to take full advantage of your ISA allowance, you will have to shelter the remaining £5,760 from tax in a stocks and shares ISA, also sometimes called an equity ISA.
It is vital to remember that any money paid into your cash ISA and then withdrawn will still count towards your ISA allowance.
Consequently, if you put £5,760 into your account and then withdraw £1,000, you will not be able to pay any more in before the end of the tax year.
What types of cash ISA accounts are available?
You can only open one cash ISA in any one tax year.
However, you can switch to a new cash ISA provider if you find a better deal – as long as the terms of your existing account allow you access to your money and the account you wish to move to accepts transfers.
And the good news is that, like standard savings accounts, cash ISAs come in a range of shapes and sizes.
Most are flexible easy access accounts. However, there are also fixed-rate cash ISAs available. Before signing up, it is therefore a good idea to check the terms and conditions.
When switching accounts, it is also vital to transfer any ISA cash across electronically using a transfer form provided by your new ISA provider as withdrawing it manually will mean losing the tax benefits.
As mentioned above, stocks and shares ISAs offer another option for those prepared to risk their capital in the hope of superior returns.
Remember, though, that if you choose to put more of the allowance in a stocks and shares ISA, it will affect the limit on your cash account.
So if you invest £7,000 in stocks and shares, you can only put £4,520 into a cash ISA.
What are the advantages of cash ISAs?
With an ordinary savings account, 20% of the interest earned by a basic-rate taxpayer goes to the taxman. Higher rate taxpayers forfeit 40% of the interest they earn while those in the top tax band lose 45%.
Avoiding this tax is therefore the big advantage of taking out a cash ISA.
To illustrate the benefit, a basic-rate taxpayer would need to find a savings account paying 3.75% to beat a cash ISA at just 3%, while a higher-rate taxpayer would need to earn 5%, and a 45% taxpayer would need a massive 6%.
Why should you use MoneySupermarket.com to compare cash ISAs?
It is important to make full use of your ISA allowance each tax year if you can, as you cannot roll over any unused allowance to the following tax year.
And the wide variety of ISAs on offer makes it crucial to compare accounts so that you are sure to get a top interest rate.
After all, there is no point avoiding tax if your ISA savings are languishing in a low-rate account. MoneySupermarket can help you find the right cash ISA and boost your returns quickly and easily.