A simple guide to cash ISAs

A Cash ISA is a type of savings account that lets you invest up to £20,000 tax-free each tax year (which runs from April 6 to April 5 the following year).

It’s a great alternative to a traditional savings account, where you’ll have to pay tax if you go over your personal savings allowance.

Currently, the personal savings allowance is:

• Basic rate taxpayers – £1,000 in interest per tax year
• Higher rate taxpayers – £500 in interest per tax year
• Additional rate taxpayers – zero personal savings allowance

A flexible Cash ISA allows you to withdraw and deposit without affecting your ISA allowance. If your ISA isn’t flexible, any money you withdraw will still count towards your total allowance even though it’s technically no longer in your ISA account.

Yes, it is possible to transfer cash from an existing Cash ISA into a new Cash ISA. To request a transfer, you’ll need to contact your ISA provider and complete a form. If you withdraw the money yourself, you’ll lose your tax-free allowance on the entire sum.

There are two types of Cash ISAs:

• Easy access Cash ISAs: allow you to deposit and withdraw money as you wish. However, interest rates might be lower.
• Fixed-rate Cash ISAs: require you to lock your money away for 1-5 years in exchange for a higher rate of interest. It’s important to note that you won’t be able to access your money early.

You can open a Cash ISA using the following steps:

• Choose a provider: shop around different providers and compare the Cash ISAs on offer. Check out our best Cash ISA round up for our pick of the providers available now.
• Apply for an account: most providers allow you to apply for a Cash ISA account online within minutes. You’ll need to provide your personal details and National Insurance Number, as well as a payment card to make your first deposit.
• Start saving: you can save up to £20,000 into a Cash ISA each tax year (which runs from 6 April to 5 April the following year.)

Here’s an example of what you could save if you avoided paying tax on your interest:

• Amount saved: £20,000
• Interest rate: 5%
• Timeframe: 3 years
• Tax on interest (for a higher-rate taxpayer who has used up their personal allowance): 40%

Using this scenario, using a cash ISA over a normal savings account could save you nearly £1,300 in tax over 3 years.

Check out our Cash ISA vs savings account guide for more details about which type of account might suit you best.