Our guide to Cash ISAs
Read more about the popular tax-free savings wrappers - how they work and the pros and cons
What is a cash ISA?
A cash ISA – standing for Individual Savings Account – is similar to a regular savings account, but there is no tax to pay on any of the interest you earn. You can put away up to £20,000 in a cash ISA every tax year (the tax year runs from April), and different types of cash ISAs are available such as fixed rate ISAs and variable rate cash ISAs.
ISA savings are in addition to the Personal Savings Allowance (PSA), which allows basic rate taxpayers to earn £1,000 of savings interest a year without having to pay any tax on it. If you’re a higher rate taxpayer, paying tax at the 40% rate 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.
How does a cash ISA work?
Cash ISAs are usually simple to open with no set-up fees. You can save up to £20,000 tax-free each tax year and your account will earn interest just like a regular savings account. As with ordinary savings accounts there are different types of cash ISAs available, such as easy access, regular saver, fixed rate or junior ISAs for under 18s. All have slightly different terms. For example, there may be restrictions on withdrawals from fixed rate cash ISAs.
You can also transfer ISA funds from previous tax years to higher paying ISA accounts. Never close down an ISA if you decide to switch though, as this will mean losing the tax benefit on your savings. Instead, you should contact your new ISA provider and ask it to arrange the transfer.
What should I consider before opening a cash ISA?
The interest rate. This will dictate how much of a return you receive on your savings. Note that initial high introductory rates can often drop after 12 months – so at this point you may want to transfer your ISA money to a better paying account
Type of account. Easy access, fixed or regular saver? Decide which type of cash ISA suits you best, what sort of a return you want and how quickly you might need to access the money
Is there a better ISA option? As well as cash ISAs, you could also consider a stocks and shares ISA. Here your money is invested in the stock market, so while there could be more reward, there is also risk to your money (the value of investments can go down as well as up)
You can only open one cash ISA each year. Think carefully before deciding which cash ISA to opt for. You can also take out a stocks and shares ISA and innovative finances ISA in the same year – but your total ISA savings can’t exceed £20,000 in any tax year
Know when the ISA deadline is. The tax year ends on 5 April. If you don’t invest before then, your tax-free allowance for the year will be gone as any unused allowance can’t be carried over
How many cash ISAs can I open?
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 in this current tax year, you cannot open another one until after April 6 next year. 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.
What is the allowance for a cash ISA?
The annual limit for cash, stocks and shares and innovative finances ISAs combined is £20,000. You can invest the full allowance in cash if you want to, or in stocks and shares, or in innovative finance ISAs, or a combination of these.
If you take money out of your ISA, you can also pay it back in (in most cases) 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 £1,000 back in if you want to and you won’t exceed your allowance. Always check the terms of your specific ISA provider however, as the rules can vary.
What interest rate can I get with a cash ISA?
The interest rate you receive will depend on the type of cash ISA you get and the provider you choose.
Fixed rate cash ISAs will guarantee your return for a set period, but variable rate cash ISAs could change if the provider decides to lower its interest rates. You can easily compare interest rates with MoneySuperMarket before deciding which cash ISA to go for.
What are the pros and cons of cash ISAs?
There are pros and cons to saving in a cash ISA. These include:
Cash ISAs provide tax-free savings
Unlike stocks and shares ISAs, with a cash ISA there is no risk that the value of your savings will go down
You can transfer your cash ISAs to better paying accounts and retain the tax advantages
High interest rates often fall after a year
Money may be locked away with a fixed rate cash ISA
Not all accounts accept transfers in from previous years and exit fees can apply
Can I switch my cash ISA from a previous tax year?
Yes. You should consider switching if you find an account that pays a higher rate of interest. But first check whether the new provider accepts transfers and whether your current provider would charge a penalty for moving your money.
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.
What are the alternatives to cash ISAs?
There are lots of alternatives to cash ISAs if you want to save or invest your money. For example:
Stocks and shares ISAs - tax-free investments. With a stocks and shares ISA (sometimes called an equity ISA) your money is invested on the stock market so while there is the potential for greater returns, there is more risk too as the value of your investment could fall.
Savings accounts – there are lots of different options for savings, from easy access savings and regular saver accounts to fixed rate bonds. It’s worth comparing potential returns with cash ISAs before making a decision.
Interest-paying current accounts – some current accounts pay higher interest on your in-credit balance, although the interest pay out is often capped and the accounts may charge a monthly fee.
Premium bonds - while premium bonds do not pay interest each bond is entered into a monthly draw, so you have a chance of winning a cash prize every month and all your savings are safe as the products are government-backed
Other useful guides
We have a wide range of guides to help you with your savings and ISA decisions.
Compare cash ISAs with MoneySuperMarket
It’s quick and easy to compare our best cash ISAs. We'll show you a list of all our available cash ISAs in one place. You can then compare by interest rate, minimum and maximum deposit and how quickly you can access your money. When you find the cash ISA you want, simply click straight through to the provider to apply.