ISAs are accounts that help you to save or invest in a tax-efficient way. Other types of ISAs include Stocks and Shares, Innovative Finance and Lifetime ISAs (LISAs). You can contribute up to £20,000 per tax year (2024/25) to an ISA, other than a LISA which is £4,000 each year until you’re 50. Any money earned in an ISA is free of both income and capital gains tax (CGT).
How do Cash ISAs work?
A Cash ISA provides a rate of interest on any money saved in it. This interest is completely tax-free.
Every UK resident over 18 has an annual ISA allowance. This is the maximum amount you can pay in across all your ISAs each tax year, which runs from 6 April to 5 April. For 2024/25, this is £20,000. It doesn’t carry over from year to year, so it’s on a ‘use it or lose it’ basis.
You can have more than one ISA, but the £20,000 annual allowance applies across them all, other than the LISA which is £4,000. As of 6 April 2024, when the rules changed, you can also have more than one Cash ISA. This could be useful if you’d like to keep a portion of your savings in an account with a higher interest rate (see below).
Types of Cash ISA
Cash ISAs come in several forms, each with their own pros and cons.
Easy-access Cash ISA
Sometimes known as an instant-access Cash ISA, these give you full access to your savings, allowing you to withdraw your cash at any time. The downside is that the interest rate will usually be lower than a fixed-rate ISA. This interest rate might also be variable, meaning that the bank can change the interest rate at any time.
Fixed-rate Cash ISA
A fixed-rate Cash ISA provides you with a guaranteed interest rate for a set length of time. They tend to offer the best rates, but your savings are locked away until the end of the period you signed up for. If you want to withdraw earlier than this, you may have to pay a penalty.
Notice Cash ISA
This offers something in between fixed-rate and easy-access Cash ISAs. They tend to offer better interest rates than easy-access Cash ISAs, but not quite as good as a fixed-rate. You need to provide a set number of days’ notice if you want or need to withdraw your cash.
Junior Cash ISA
A Junior ISA (or JISA) allows parents or guardians to save money for their child in a tax-efficient way. For 2024/25 the JISA’s annual allowance is £9,000. All the money you pay in, however, belongs to the child.
Control of the JISA passes to the child when they turn 16, allowing them to add money if they wish. Withdrawals can only be made by the child and only once they’ve turned 18.
Flexible Cash ISAs
A flexible Cash ISA lets you withdraw your savings without impacting your annual ISA allowance (more on this below). They effectively allow you to access your savings without being penalised, whilst keeping the tax-free benefits.
For example, if you pay £20,000 (the maximum amount for 2024/25) into a non-flexible Cash ISA, then withdraw £5,000. Even though your balance is only £15,000, you wouldn’t be able to deposit anymore into your account. This is because your annual allowance would be completely used up by the initial £20,000 deposit.
In a flexible Cash ISA, on the other hand, you’re allowed to replace the amount you withdraw in a tax year. You’d just need to ensure the repayments go back into the same account within the same tax year as the withdrawal.
What to consider when opening a Cash ISA
Using your ISA allowance
Each tax year (6 April to 5 April), you can deposit up to your ISA allowance amount. This is £20,000 for 2024/25 for all ISA types other than a LISA and it can be saved into one account or spread across multiple ISA accounts.
Unlike in a pension, if you don’t use your ISA allowance within a tax year, you lose it. You can’t carry over any leftover into the next tax year. Each tax year you start with a fresh allowance. This means if you only pay £15,000 in one year, you can’t carry the leftover allowance of £5,000 into the following tax year.
In a non-flexible ISA, withdrawing money from your account won’t affect your annual allowance. For example, if you deposit £20,000 in a tax year and use your full ISA allowance, then even if you make a withdrawal from your ISA, your allowance is still used up. You won’t be able to make any further deposits.
Understanding potential charges
Fixed-rate and some notice Cash ISAs might charge a fee if you decide to withdraw or transfer your money before your term is complete. If you think you might need access to your savings within this term, consider an easy-access ISAinstead.
Transferring your ISA
At some point you may wish to change your Cash ISA provider. For example, you might want to consolidate other ISAs, or move to one that’s offering a better interest rate. In this situation, it’s important to complete the transfer in the right way. If you simply withdraw the money yourself to pay into the new account, you’ll lose the tax benefits. So instead, you could ask your new provider to perform the transfer and ensure your savings are kept tax-free. Just remember that there might be a penalty fee for transferring to another provider.
It’s also worth knowing that you can transfer part of a Cash ISA. This may be useful if you currently have an easy-access Cash ISA, but are confident you won’t need access to a portion of your money in the near future. In this situation, you may want to transfer part of your money to a fixed-rate Cash ISA, taking advantage of higher interest rates.
Is a Cash ISA right for me?
Cash ISAs can be a great way to save in a tax-efficient way, alongside other financial products, such as your pension. But before you decide if it’s right for you, you need to understand your savings goals.
Are you saving for the short-term (less than five years)?
Cash ISAs are completely tax-free and generally considered to be low risk. This means that, as long as you’re a UK resident over the age of 18, they might work well for those with short-term savings goals. Or they could be perfect for those approaching retirement, who want to reduce their investment risk.
But you might not even need a Cash ISA to take advantage of tax-free interest. Your Personal Savings Allowance (PSA) is the amount your standard savings and current accounts can earn in tax-free interest each tax year. It’s completely separate from your ISA allowance and, just like an ISA, allows you to earn tax-free interest on your savings. The allowances vary depending on your tax bracket, for example:
basic rate taxpayers (20%) can earn up to £1,000 in tax-free interest each year;
higher rate taxpayers (40%) can earn up to £500 in tax-free interest each year; and
additional rate taxpayers (45%) don’t get an allowance.
For many, this allows you to save a significant amount without paying any tax, as you remain under your PSA. In these cases, it might be best to simply find the account, whether that’s a regular savings or Cash ISA, that offers the best interest rate. If you’re already close to exceeding your PSA limit, then a Cash ISA could be a great way to save more in a tax-efficient way.
Are you saving for the long term (more than five years)?
Cash ISAs have set interest rates, so they’re generally considered to be a low-risk way of saving. But low risk can also mean lower returns, and lower returns can see more of your savings eroded by inflation.
So other savings and investment options may be more suitable for long-term savers. A Stocks and Shares ISA, for example, invests your savings in funds, bonds and company shares, giving them the potential to grow faster. As with any investment, however, the value can go up and down and you might get back less than you put in. This means a Stocks and Shares ISA may be suited for those who are comfortable with risk and with their money remaining invested for the long term.
Of course, if you’re saving for your retirement, then investing in a pension may work best. As well as the potential for investment growth, most UK taxpayers get tax top ups on their personal pension contributions. This means that the government effectively adds money to your pension pot. Basic rate taxpayers usually get a 25% tax top up; so if you pay £100 into your pension, HMRC adds an extra £25 making it £125. Most higher and additional rate taxpayers can claim back extra tax relief by completing a Self-Assessment tax return.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Last edited: 20-08-2024
