Did you know you can invest in a cash ISA and pay no tax on the returns? Make sure to take advantage of your annual tax-free ISA allowance of up to £20,000. Some accounts also allow you to transfer in money invested in the previous tax year so you can maximise returns on all your tax-free savings.
Easy access tax-free ISAs let you take advantage of your annual ISA allowance, and you can still have instant access to your cash.
What is a cash ISA?
A cash ISA is a type of savings account that lets you earn interest on your savings without paying tax. In the current 2021/2022 tax year, you can put up to £20,000 in to an ISA. You’ll get a new allowance each tax year.
How do I use a cash ISA?
You can only pay into one cash ISA each tax year, but you can also invest in a stocks and shares ISA and/or an innovative finance ISA, so long as you don’t go over your £20,000 allowance.
If you have opened several cash ISAs over the years, you can transfer the funds into one single cash ISA – you’ll keep the tax-free benefits, and you’ll only have one account to manage. Just make sure your existing ISAs allow you to access your money and the new one allows transfers in.
It’s important to transfer the money electronically using a transfer form which your new ISA provider will give you. If you withdraw the money yourself, you’ll lose its tax-free status.
Some ISAs are flexible, which means you can withdraw and replace money during the same tax year without losing that amount from your allowance. However, this doesn’t apply to all ISAs as with some, if you withdraw money you’ll lose that amount from your tax-free allowance – even if you replace the funds.
It’s important to remember that ISAs can vary depending on the type of account it is and the provider you open it with.
Types of cash ISA
There are a number of different types of cash ISA, each suited to different people and circumstances. They include:
- Easy access – an easy access ISA lets you access your money whenever you need to without incurring a penalty, although in some cases, you’ll find withdrawals are restricted to a set number a year. You can also add money to your ISA throughout the year (so long as you don’t go over your allowance).
- Regular saver – a regular saver ISA generally offers a fixed interest rate as long as you make a regular deposit each month. They usually last for 12 months and you won’t be able to access your money during that time.
- Junior – a Junior ISA lets you put away a maximum of £9,000 a year tax-free (in the current 2021/22 tax year) for your child, as long as they’re under 18 and living in the UK. They remain tax-free until the child turns 18 and the account becomes an adult ISA.
- Notice – a notice ISA can often pay better interest rates than other ISAs, but they also require you to tell your bank or building society that you want to withdraw money in advance. If you withdraw money without notice, you might lose the higher interest rate.
- Fixed term – a fixed term ISA keeps your money locked away for the whole term, normally one to five years, and gives you a fixed interest rate. Interest rates are often higher than on easy access accounts as you’ll need to leave your funds untouched.
- Lifetime – Lifetime ISAs are generally good for saving for your first home or putting money aside for your later years. They let you deposit up to £4,000 a year, and the government will add another 25% of what you deposit, up to £1,000 a year. You’ll only be able to withdraw money when you buy your first home or when you turn 60 years old – withdrawing money for anything else will carry a 25% charge.
- Help to Buy – Help to Buy ISAs are for people who’ve never owned a property, and similar to Lifetime ISAs the government will also top up your payments by 25%. The most the government will contribute is £3,000, but you’ll need to have paid in £12,000 to get this. You can pay in up to £1,200 in the first month, and after that up to £200 a month.
Aside from cash ISAs, you can get tax benefits on capital gains you make through financial investments if you open a stocks and shares ISA. Just be aware this is an investment and the value of your investment and the income derived from it can go up as well as down - you may get back less than you originally invested.
There is also the option of putting money in an innovative finance ISA which lets you avoid paying tax on capital gains you make on a peer-to-peer or crowdfunding investment. Again, though, there are risks with this type of investment. Peer-to-peer is regulated by the Financial Conduct Authority, but neither peer-to-peer nor crowdfunding is covered by the Financial Services Compensation Scheme. There is a risk you may lose some or all of your original investment.
Cash ISAs vs savings accounts
Since 2016, all savers have been given a Personal Savings Allowance (PSA) which means basic rate tax payers can earn up to £1,000 a year in tax-free interest, and higher rate tax payers can earn up to £500 a year. Additional rate tax payers don’t benefit from the Personal Saving Allowance.
As a result, many people with savings accounts will be able to save and earn interest without paying any tax.
However, ISAs still have their uses as your ISA allowance is in addition to your PSA, so if you’ve exceeded your PSA, opening an ISA can be a good way to continue earning interest tax-free.
Surveyed 2,000 internet users, data collected by Mintel, accurate as of May 2019
How do I open an ISA?
You’re normally able to open an ISA over the phone, online, by post, or by dropping into your bank or building society’s branch, though this will depend on the provider.
The provider will need your name, address, and your national insurance number – this is because each person is only allowed to open one ISA every tax year, and this is tied to your national insurance number. You’ll also need to be at least 16 years old for most ISAs, except for stocks and shares ISAS where you need to be 18.
It’s worth remembering that there are no financial checks involved in opening an ISA, so you can get one even if you have bad credit. As most banks are part of the Financial Services Compensation Scheme, your money will be protected up to £85,000 per financial institution.
Surveyed 1,672 internet users, data collected by Mintel, accurate as of May 2019
Comparing cash ISAs
As you can only pay into one 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.