Published: 16 May 2023
If you're looking for a place to grow your savings, a Cash ISA might provide a solution.
But why are Cash ISAs so popular? How does a Cash ISA work? And what’s important to know before you open one? To clear things up, we've put together this short guide.
What's a cash ISA?
A Cash ISA is a form of Individual Savings Account (ISA) that works much the same as a normal savings account but with one key difference, your ISA allowance, which allows you to earn tax-free interest on your savings.
You can get Cash ISAs that offer fixed or variable interest rates and the level of access you have to your savings can also differ between different Cash ISA products.
Cash ISAs can provide a solution to suit your saving goals dependent on what your goals are. There are plenty of Cash ISA options, too, and you can find out whether it's the right type of savings account for you below.
How much can I put in a Cash ISA?
Currently, the ISA allowance for most forms of ISA, including Cash ISAs, is £20,000 per tax year. Once the tax year refreshes on 6 April, your allowance resets, so the £20,000 allowance starts again and you can continue to save. You can spread your allowance across multiple accounts and different types of ISA, for example you can hold and deposit into a Cash ISA and Stocks and Shares ISA within the same year.
What about the personal savings allowance?
If you're a basic or higher-rate taxpayer, you also have a personal savings allowance (PSA) that allows you to earn up to £1,000 (basic) or £500 (higher) in interest without having to pay tax on it. Additional-rate taxpayers don't get any PSA. The tax-free interest from your ISA doesn't count towards your PSA.
Is my money safe in a Cash ISA?
Savings in a Cash ISA are covered by the Financial Services Compensation Scheme (FSCS), the UK's deposit guarantee scheme.
Eligible deposits up to a total of £85,000 per building society, bank or credit union are protected, However, if you have multiple accounts with multiple banks that are part of the same banking group they will be treated as one bank and the £85,000 limit will apply to all.
Can you have a Stocks and Shares ISA?
Just as you can have more than one Cash ISA open at once, you can also have a Cash ISA and a Stocks and Shares ISA open at the same time.
Your ISA allowance of £20,000 applies to the different types of ISA available:
- Cash ISA
- Stocks and Shares ISA
- Innovative finance ISA
- Lifetime ISA: You can put in £4,000 each year and this counts towards the overall ISA allowance
- Junior ISA: If your child is under the age of 18 and living in the UK (or you’re a Crown servant living outside of the UK) they have a Junior ISA allowance of £9,000 for this tax year
Who can get a Cash ISA?
You can get a Cash ISA if:
- You live in the UK or you're working abroad as a crown servant or their spouse or civil partner.
- You're 18 or over.
Depending on the type of Cash ISA that you choose to suit your needs and circumstances, there will also be conditions on opening and maintaining the account, such as:
- A minimum opening and operating balance: this is the amount that you need to open the account and maintain throughout to keep your interest rate. With our Cash ISAs, that's anywhere from £1 to £5,000.
- Access: some accounts have access restrictions on them which limit the number of withdrawals you can make. If you surpass your agreed withdrawal limit, you'll potentially lose interest on the account.
- Account opening type: it's best to check if your account is operated online, in branch, or by post
What are the different types of Cash ISA?
Fixed Rate Cash ISAs
With a Fixed Rate Cash ISA, you get a fixed rate of interest on your savings for a set amount of years. You'll commit to putting away your money for a set period - one, two or three years, for example. During that time, withdrawals may incur an interest charge and account closure, so you need to be ready to put your money away without touching it for the agreed duration of the fixed rate period.
With Fixed Rate Cash ISAs, you'll typically get a higher interest rate on your savings compared to other types of Cash ISA.
Variable Rate Cash ISAs
Variable Rate Cash ISAs offer a variable rate of interest on your savings. That means that your interest can go up or down while you hold the account.
While Fixed Rate Cash ISAs may restrict withdrawals, Variable Rate Cash ISAs may offer differing levels of access. Either:
- Unlimited/easy: you can make as many cash withdrawals as you need.
- Limited: you're allowed to make a pre-agreed number of withdrawals per year. If you exceed that number, you'll face an interest charge on your account.
What are the benefits of a Cash ISA?
There are a few reasons why so many people put their savings into a Cash ISA:
- You'll earn tax-free interest on up to £20,000 of savings per tax year.
- It's a place to earn tax-free interest if you've used up your personal savings allowance (PSA) or don't have one.
- There's a lot of variation in account types.
- You have FSCS protection on up to £85,000 eligible deposits with each provider.
- You can transfer money from previous tax-year ISAs, allowing you to consolidate all of your savings in one place.
Please also bear in mind the following non-exhaustive list:
- If you’ve not used your allowance for the year, it doesn't roll over to the new year.
- If you access your money but have withdrawal restrictions on your account, you'll face an interest charge on your savings.
What's the best Cash ISA for me?
The best Cash ISA for you depends entirely on what you need from a savings account. You'll want to think about:
- If you can put your money away for a set amount of time.
- What level of access to your money you need while you hold the account.
- For how long you want to save.
- Whether you want a fixed or variable rate of interest.
If you have any questions about our range of Cash ISAs, you can always get in touch with us and speak to a member of the team.
This article is intended as a summary only and is not advice. You should seek independent financial or legal advice if needed.
