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What is a cash ISA?

Cash ISAs: A complete guide

Victoria Russell
Written by  Victoria Russell
5 min read
Updated: 26 Apr 2024

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 stock market drops

  • Choose from easy access, regular saver, and fixed-rate ISAs or junior ISAs

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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.

They're an attractive option for savers in the UK, offering a tax-efficient way to store away funds.

Cash ISAs come in various forms, including fixed-rate and variable-rate ISAs, catering to different savings needs and preferences.

Do cash ISAs affect your personal savings allowance?

They do not. Cash ISAs are 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.

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 an ISA is right for you.

Here's what you need to know:

  • There's no limit on the number of cash ISAs you can open in a tax year, subject to the £20,000 annual limit

  • There are several options to choose from, such as easy access, 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 an ISA online or in-branch, without any setup fees.

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.

  • 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.

  • 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'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.

What are the pros and cons of cash ISAs?

  • Advantages: Tax-free savings, stable value, and the ability to transfer to better accounts.

  • 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 ISA for a better interest rate can be beneficial. But it's vital that you remember to:

  • Always check for transfer acceptance and potential penalties.

  • Remember that 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 based on interest rates, deposit requirements, and access to funds, so you can find the right ISA for your needs. You can also compare fixed and variable rate ISAs.

Compare cash ISAs