A Cash ISA is a tax-free savings account. This means you pay no tax on the interest earned. You can save up to £20,000 tax free in a Cash ISA every tax year in the UK.
Read on to find out more.
Why a Cash ISA might be right for you
If you want to protect your money from taxation and keep the interest you earn on your savings, a Cash ISA is the perfect option.
There are three main types of Cash ISA:
However, it’s important to know that each type of Cash ISA has slightly different terms and interest rates, and some have rules on how often you can withdraw money.
Some general rules that apply to all Cash ISAs include:
- Tax-free interest payments.
- Ability to save up to £20,000 each tax year.
- You can transfer ISA funds from previous tax years into higher paying ISA accounts.
- Choose from three different types of Cash ISA depending on how much access you will need to your savings.
What are the benefits of having a Cash ISA?
Removes interest rate risks
Investing your money in a Cash ISA guarantees any interest earned (within the annual investment allowance of £20,000) will remain tax free – even if interest rates rise.
Great for long term savings
Although the current ISA limit allows you to save up to £20,000 each year, the tax-free benefits are unlimited. You will continue to earn tax-free savings on the money invested in ISAs for years to come.
If you consistently save the maximum amount, you’ll be able to earn a significant amount of interest without paying any tax.
Cash ISAs can be an attractive choice when it comes to inheritance. Married couples and people in civil partnerships can inherit their partner’s ISA allowance without paying tax. This even applies if the surviving partner isn’t inheriting the ISA money.
For example, if a husband had £50,000 worth of ISA assets, his wife’s ISA allowance would increase by £50,000 in the event of his death. Even if the husband leaves the money from the ISA fund to their children, the wife’s allowance would still increase by the same amount.
The bereaved partner can claim the increased ISA allowance up to three years after the death of their partner, or 180 days after the estate has been administered if this takes longer.
What are the main Cash ISA rules?
There are a number of rules when it comes to using a Cash ISA but the main ones are:
- You can save a maximum of £20,000 per year in ISAs. This is a limit set by the Government.
- You can only open one Cash ISA each tax year, but you can keep Cash ISAs from previous years open. You can also transfer ISA funds from previous tax years into higher paying ISA accounts.
Things to consider before opening a Cash ISA
With a Fixed Rate Cash ISA, your interest is fixed for the term – 1 to 5 years. However, with a Variable Rate Cash ISA, interest rates can change. It’s a good idea to be aware of what the best rates are to guide your decision.
Type of account
Fixed Rate Cash ISAs can offer higher rates of interest. However, you can’t withdraw money unless you take out the full amount and close the account, which will incur an early closure charge.
With a Variable Rate Cash ISA, you can usually withdraw money whenever you need it. Any money withdrawn will lose its tax-free status, and you will only ever be able to deposit up to your annual allowance limit even after withdrawals.
Other types of ISA
Cash ISAs are just one type of ISA - Stocks and Shares ISAs and Innovative Finance ISAs are also options for people looking to save their money without incurring tax on the interest.
Please note that the other types of ISA involve some risk to your money.