Cash ISAs Q&A
Questions & Answers
Got a question about Cash ISAs? Get your answer here...
Got a question about Cash ISAs? Get your answer here...
A cash ISA works in much the same way as an ordinary savings account, except you do not pay tax on the interest you earn.
ISAs are in addition to the new Personal Savings Allowance (PSA), which came into effect on 6 April, 2016. All basic rate taxpayers can now earn £1,000 of savings interest a year without having to pay any tax on it. You’re a basic rate taxpayer in the 2019-20 tax year if your income is less than £50,000).
If you’re a higher rate taxpayer, paying tax at the 40% rate on an income between £50,001 and £150,000, you’re entitled to a lower PSA of £500 a year.
If you’re an additional taxpayer earning £150,001 or more, you won’t get an allowance at all.
You must be a UK resident, aged 16 or over. Junior ISAs are available for younger children.
But watch out if you are 16 or 17 years old and the money in your ISA is a gift from a parent as they could be liable for tax on the interest earned.
Do not close an ISA if you decide to switch as you will lose the tax benefit...
Cash ISAs can be an attractive option for anyone who normally pays tax on their savings.
Although the PSA might, on the face of it, make ISAs appear less attractive, they should not be over-looked, as any cash saved within an ISA will be tax-free indefinitely. Even if you don’t have enough savings to earn £1,000 in interest now, it is possible that you could in future.
You might also consider an equity ISA that invests in stocks and shares, though they are more risky.
Like savings accounts, cash ISAs are available from most banks and building societies, as well as supermarket banks and other providers such as the Post Office.
You can also open an ISA through a number of online banks. You can compare what’s available using our cash ISA comparison. Make sure you click on 'See all accounts'.
No, there are no set-up fees for cash ISAs.
The annual limit for cash and stocks and shares ISAs combined is £20,000 for the 2019/20 tax year. You can invest the full allowance in cash if you want to, or in stocks and shares, or in peer-to-peer lending via an innovative finance ISA, or a combination of these three.
The rates on cash ISAs vary so you should search the market to make sure you get the best deal.
Yes. The most straightforward cash ISAs are easy access and pay variable rates of interest. In other words, you can get at your money when you want but the interest rate could go up or down.
Some ISAs pay a fixed rate for a set term, rather like a savings bond. For example, an ISA might pay 2% fixed for three years.
Fixed-rate ISAs often pay higher interest than variable accounts, but you have to be prepared to lock you money away, as there is usually a penalty for early withdrawal.
You can have multiple ISAs, but you can open only one cash ISA in each tax year.
So, if you have opened a cash ISA since 6 April, 2019, you cannot open another one until 6 April, 2020.
Note, however, that transfers from previous years’ ISA funds don’t count. So even if you have opened a cash ISA this tax year and paid new funds into it, you can still transfer funds from previous cash ISAs into another ISA account – so long as you don’t top it up.
Yes – and you should consider switching if you find an account that pays a higher rate of interest.
However, you should first check whether the new provider accepts transfers and whether your current provider would charge a penalty for moving your money.
It’s also worth checking whether your existing ISA has ‘lapsed’. This can happen if you haven’t paid into it in a given tax year and your provider will need to make it ‘live’ again before you can transfer funds.
You can transfer savings from both the current and previous years.
Money from previous years can be split between new cash ISAs, and you can choose to transfer only a portion of the holding in an existing ISA.
However, if you decide to transfer money from the current year’s ISA, you must switch the full amount.
Let’s say you put £5,000 in an ISA in the current tax year and £3,000 in the previous year. If you want to switch to a different ISA in the current year, you would have to transfer the full £5,000 from this year’s ISA. But you could choose to switch only £1,000 from the previous year.
Either way, do not close an ISA if you decide to switch as this will mean losing the tax benefit. Instead, contact your new provider and ask it to arrange the transfer.
Yes, though the rules on transfer amounts are the same. You can also switch from a stocks and shares ISA to a cash ISA if you want.
You can withdraw money from an easy access ISA whenever you wish, at no cost.
Withdrawals from fixed term ISAs are not usually permitted and penalties apply.
Under new flexible ISA rules, any money you withdraw from a cash ISA can be replaced the same tax year without this affecting your annual ISA allowance.
In other words, if you put £20,000 into your ISA this tax year and then withdraw £1,000, you can pay this back in without exceeding your ISA allowance.
So long as you open a cash ISA with a bank or building society that is authorised by the Financial Conduct Authority (FCA), you will be protected by the government-back Financial Services Compensation Scheme (FSCS).
The scheme guarantees up to £85,000 per person, per institution, so if the bank collapsed, you would be sure to get back that amount.
Bear in mind, however, that the limit applies to each authorised firm, not to each brand.
As Halifax and Bank of Scotland, for example, are part of the same group, you should therefore ensure your combined balances don’t exceed £85,000.