What is a cash ISA?
Cash ISAs are a tax-free way of saving and you can open as many as you like. Here we look at how cash ISAs work, their pros and cons and how to find one that works for you.
Key takeaways
You can deposit up to £20,000 per tax year in an ISA
New rules for 2024/25 mean you can open as many cash ISAs as you like
Up to £85,000 of your money is protected within a cash ISA
You 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 standard savings account, but 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).
There are lots of different types of cash ISAs, such as fixed-rate and variable-rate ISAs, or even cash lifetime ISA to save towards your first home or retirement.
How do cash ISAs work?
Here are some of the key points around how cash ISAs work:
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 into new ISA accounts, but you need to do this through the new provider. If you withdraw the money yourself you will lose the tax benefits.
You can also transfer money from a stocks and shares ISA to a cash ISA, using a transfer form.
You can open a cash ISA online, through an app, or in-branch, depending on the provider
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?
Here are some key things to consider when choosing an ISA:
Aim for the best returns, but be wary of introductory rates that may drop after a certain period.
There may be restrictions on when you can withdraw your money from a cash ISA, especially if you’ve chosen a fixed-rate account. Make sure you’re happy with this, if you need access to your money at short notice, an easy-access cash ISA will be a better option.
You can choose from accounts that work via an app, online, by post, by phone or through a bank branch.
Beyond cash ISAs, there are stocks and shares ISAs which you can use to invest. These involve more risk but potentially higher rewards as your money is invested in the stock market.
You must use your allowance before the tax year ends on April 5th, or you'll miss the window .
Key considerations when choosing an ISA
Have I found the best interest rate?
When can I access the money?
How will I manage the account?
Is it better to invest my money?
Am I within the ISA deadline?
Do cash ISAs affect your personal savings allowance?
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 annual allowance.
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 5.04%[1].
Are cash ISAs safe?
Under the Financial Services Compensation Scheme (FSCS) up to £85,000 of money is protected if a bank were to go bust. This is per person, per financial group.
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.
How do you transfer an ISA from a 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 the new provider allows you to transfer ISAs (not all do)
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, some of the alternatives to consider include:
Stocks and shares ISAs
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.
