What is a cash ISA?
Read more about the popular tax-free savings wrappers. We'll explain how cash ISAs work, their pros and cons and how to find one that works for you.
Key takeaways
Cash ISAs are a great way to benefit from tax-free savings - you can deposit up to £20,000 per tax year
New rules for 2024/25 mean you can open as many cash ISAs as you like, provided you don't exceed the £20,000 annual limit
Returns from cash ISAs can be less attractive than stocks and shares ISAs, but with cash ISAs you're not at risk of losing money if the companies you're invested in decline in share price value.
Yoi can choose from easy access, fixed-rate or junior ISAs
What is a cash ISA?
A cash ISA (Individual Savings Account) is similar to a regular savings account, but with the key selling point that there's no tax to pay on any of the interest you earn.
Cash ISAs are an attractive option for savers in the UK, offering a tax-efficient way to store away funds. Your savings in a cash ISA can also be protected by the Financial Services Compensation Scheme (FSCS).
Cash ISAs come in various forms, including fixed-rate and variable-rate ISAs, catering to different savings needs and preferences. You can even get a cash lifetime ISA to save towards your first home or retirement.
Do cash ISAs affect your personal savings allowance?
They do not.
Cash ISAs are exempt from income tax and separate from the Personal Savings Allowance (PSA), which allows basic rate taxpayers to earn £1,000 in interest tax-free annually, and higher rate taxpayers to earn £500.
Additional rate taxpayers do not receive a PSA, making cash ISAs even more beneficial for them.
There is no limit on the number of cash ISAs you can open, as long as you stay within your £20,000 allowance.
What are the rules for cash ISAs?
Regulations around ISAs are quite stringent. And it's important to get your head around them before you decide whether a cash ISA is right for you.
Here's what you need to know:
You're able to have more than one cash Isa, as there's no limit on the number of cash ISAs you can open in a tax year, subject to the £20,000 ISA allowance
There are several cash ISA options to choose from, such as easy access, Lifetime ISA, regular saver, and fixed-rate ISAs, as well as junior ISAs for those under 18.
The terms of cash ISAs vary, and some may have restrictions on withdrawals, especially fixed-rate cash ISAs.
It's possible to transfer funds from previous tax years to a higher paying ISA account, but remember to never close an ISA to switch. Instead, arrange a transfer through the new provider to retain the tax benefits.
You can also transfer from a stocks and shares ISA to a cash ISA, using a transfer form.
You can open a cash ISA online or in-branch, without any setup fees.
Eligibility requirements for cash ISAs will vary across providers, however you'll usually need to be 18 or over and a UK resident
What should I consider when choosing an ISA?
Have I found the best interest rate?: Aim for the best returns, but be wary of introductory rates that may decrease after a certain period.
Does it suit my financial aims?: Your choice should align with your need for returns and how often you'll need access to your funds. If you're a first-time buyer saving for a house deposit, then a Lifetime ISA could be an option.
Are other ISA options a better fit?: Beyond cash ISAs, there are stocks and shares ISAs. These involve more risk but potentially higher rewards as your money is invested in the stock market. Your savings in a stocks and shares ISA should be FSCS-protected as long as the account is with a FCA-authorised firm.
Am I within the ISA deadline?: You must use your allowance before the
tax year ends on April 5th, or you'll miss the window .
What are the restrictions? Pay close attention to the cash ISA's terms and conditions. If you want instant access to your savings then a fixed-term cash ISA may not be for you, as you'll be limited to the number of withdrawals you can make. If you plan on regularly
withdrawing money from your cash ISA, then you may be better suited to an easy access
cash ISA. If you plan on making transfers in the future, look at the rules in place for once you have an existing ISA with the provider.
What's the difference between cash ISAs and stocks and shares ISAs?
When comparing cash ISAs to stocks and shares ISAs, the key difference are the risks and potential returns they offer. Here's what you need to know:
Cash ISAs offer tax-free returns with a guaranteed rate over a set time.
Stocks and shares ISAs, while potentially more rewarding, come with the risk of losing money as they are subject to stock market fluctuations
Both types of ISAs share the same annual deposit limit of £20,000, allowing for tax-free growth of your savings.
What interest rates are available with cash ISAs?
Interest rates for cash ISAs vary based on the type and provider. But it's fair to say that you can generally get better rates from challenger banks, rather than sticking with what's on offer from the best-known, high-street banks.
As of today, the best rate for a cash ISA is 5.18%i.
What are the pros and cons of cash ISAs?
Advantages: Tax-free savings, stable value, and the ability to transfer to better accounts, protection by the Financial Services Compensation Scheme
Disadvantages: Interest rates may decrease, funds might be locked in fixed-rate ISAs, and not all accounts permit transfers, sometimes incurring exit fees.
What do I need to consider when switching cash ISAs from previous tax years?
Switching your existing ISA for a better interest rate can be beneficial. But it's vital that you remember to:
Check if your provider allows you to transfer ISAs
Find out if you'll be charged penalties for an ISA transfer
Remember that ISA transfers from the current year must include the full amount, while previous years can be partial.
Read our guide on switching your ISA funds for more information.
What are the alternatives to cash ISAs?
If cash ISAs don't seem right for you, consider alternatives like stocks and shares ISAs, savings accounts, interest-paying current accounts, and premium bonds.
Other useful guides
We have a wide range of guides to help you with your savings and ISA decisions.
Compare cash ISAs with MoneySuperMarket
When you're ready to explore your options, you can compare cash ISAs on MoneySuperMarket.
You can compare ISAs based on interest rates, deposit requirements, and access to funds, so you can find the right cash ISA for your needs. You can also compare fixed and variable rate ISAs. To cover all bases, you can compare all of our best savings accounts to find the best option for you.
