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Seven cash Isa myths exposed

published: 22 March 2022
Read time: 5 minutes

Feeling a bit confused when it comes to cash Isas? We separate the fact from the fiction

March and early April are often referred to as ‘Isa season' - because this is savers' last chance to save or invest their annual Isa allowance (up to £20,000) before the end of the tax year on April 5. All savings interest or investment returns are paid tax free in Isas.

You may be thinking about putting money into a cash Isa (individual savings account) before the end of this tax year, or revisiting existing Isa savings to see if you can improve the rate.

But when it comes to Isas there are often many wrongly-held assumptions about how they work.

We've tried to clear up some of the confusion around cash Isas, and set out some of the key things you need to know – helping you to take advantage of the benefits offered by these tax-free savings wrappers.

1. I don’t need a cash Isa as I don’t pay tax on my savings – FICTION

Under rules introduced in 2016, basic-rate taxpayers can earn £1,000 a year in interest from ordinary savings accounts without having to pay tax. This is known as the ‘personal savings allowance.’

But having this allowance doesn’t do away with the need for cash Isas. Putting money in a cash Isa is about future-proofing your hard-earned cash against interest rate rises and changes to the tax system.

If, say, the interest rates paid on savings go up, or if the ‘personal savings allowance’ goes down – or gets withdrawn – at some point in the future, you could face tax on your savings a lot sooner.

Equally, if at some point you find yourself as a higher-rate taxpayer, perhaps after a pay rise, your tax-free limit will fall to £500, meaning you can only earn this amount before having to pay tax.

A cash Isa can be a valuable tax shelter, helping you protect your savings from tax, for the long term.

man typing on a mobile phone

2. There’s no point taking out a cash Isa now as the rates are so low – FICTION

Generally speaking, as a saver, you will typically find that rates on cash Isas are slightly lower than the rates paid on standard savings accounts - this usually holds true for variable and fixed rate accounts. 

But interest rates in general are rising - so it pays to look around to spot new Isa launches and deals.

3. There’s no point shopping around and comparing rates on cash Isas – FICTION

Even though rates on cash Isas might seem pretty low at present, this should not deter you from comparing deals. And, following recent increases to the Bank of England Bank Rate - higher savings rates should soon start to filter down to savers. Remember, you could still get a better rate on your hard-earned cash by switching.

4. There’s no issues with me transferring a cash Isa to a new provider myself – FICTION

If you’ve compared rates and found the rate on your current cash Isa can be bettered, you must first check that ‘transfers in’ are permitted into your new cash Isa. If the answer is yes, you must not transfer the money yourself, as if you withdraw the money, your savings pot will lose its tax-free status.

It’s essential you follow the simple transfer process, using a transfer form which your new provider will give you. The transfer will then happen electronically.

5. I can carry my Isa allowance over to the new tax year – FICTION

You can put up to £20,000 into an Isa in each tax year. You'll get a new Isa allowance each tax year.

Crucially, though, you cannot carry over your allowance. If you don’t use it, you lose it. This is why many savers scramble to put their money into Isas in March and early April every year.

6. With an easy-access Isa, I can make unlimited withdrawals – FICTION

When taking out an easy-access cash Isa, you need to read the small print carefully, as while some will offer unlimited withdrawals, others may only permit, say, two or three penalty-free withdrawals a year.

If you think you are likely to need access to your cash more often, this may not be such a good option.

7. There’s no reason for me to open a lifetime Isa – FICTION

The lifetime Isa is a product designed for savers trying to build up a deposit for their first home.

With one of these products, you get a 25% bonus from the government, worth up to £1,000 a year if you save the maximum of £4,000 a year. It means that in total, you can get up to £32,000 towards your first home.

If you have no immediate plans to buy a property, you may think it’s not worth opening one of these Isas. But even if your home-ownership plans are some way off, it’s still worth getting a lifetime Isa now, as you need to have an account open for 12 months before being able to use it to purchase a property.

You also can’t open a lifetime Isa once you turn 40, as the scheme is only open to those aged between 18 and 39. So, if you’re approaching this cut-off point, you should open an account sooner rather than later, or you could miss out altogether.

Finally, it’s important to note that with a lifetime Isa, you can withdraw the money penalty-free if you are using it for a first-time house purchase. But if you withdraw the cash for any other reason, you will be subject to a 25% charge.

That said, if you wait until after you turn 60 to withdraw the money, this 25% charge will no longer apply, meaning you can also use the money to help fund your later life.

Compare cash Isas with MoneySuperMarket

As you can only pay into one cash Isa every tax year, it’s important you choose the right one for you. Comparing Isas on MoneySuperMarket is quick and simple. You can compare a range of available options and sort through offers by their interest rate.

Once you’ve picked the account you want to open, just click through to the provider and you’ll be on your way to saving.

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