This blog is general information only. It isn’t advice and isn’t an insight into the views of TSB or any of our Partners.
We know cash ISAs can be confusing. What are they, how are they different to other savings accounts, and why should you consider getting one? We answer these questions in this guide to cash ISAs.
What is a cash ISA?
ISA stands for “individual savings account”. All ISAs are types of savings or investments that you don’t pay tax on. So, whatever interest or capital gains you earn from an ISA, you will not pay any tax – making the most of your hard-earned money.
A cash ISA is just one type of ISA and is a popular choice among savers. Apart from its tax status, consider cash ISAs to be like any ordinary savings account. This means there are variable rate, instant access cash ISAs with flexibility of accessing your money when you want, and fixed rate cash ISAs with less access but usually with a higher interest rate.
As well as cash ISAs, there are other types of ISAs: stocks and shares ISAs, innovative finance ISAs, Help to Buy ISAs and Lifetime ISAs.
There are also junior ISAs for the under 18s, which come in the form of either cash ISAs or stocks and shares ISAs. Junior ISAs have slightly different rules to ISAs for adults and have a lower annual ISA allowance limit of £4,260 for the tax year 2018/19. Once the child reaches 18, junior ISAs converts to regular ISAs.
How much can you save in a cash ISA?
The Government sets a maximum amount you’re allowed to pay into ISAs each tax year, which runs from 6 April to 5 April. For tax years 2018/19 and 2019/20, the annual ISA allowance for each year is £20,000. What you’ve paid into ISAs in previous years don’t count towards your current annual allowance e.g. if you’ve paid in £20,000 in 2018/19, you can pay up to another £20,000 in 2019/20.
It’s possible to mix and match your ISA allowance between the different types of ISAs. For example, you can use up to your entire ISA allowance on a cash ISA, stocks and share ISA and innovative finance ISA; you can also have a Help to Buy ISA and Lifetime ISA, though they have lower limits. It’s also worth knowing that, since 6 April 2016, ISAs have become “flexible”. This means you can withdraw and replace money in the same tax year without the replacement counting towards your annual allowance. Every ISA has its own terms and conditions but all you need to remember is that the combined total you save or invest in your ISAs in the tax year should not exceed £20,000.
It’s possible to open more than one cash ISA per year with the same provider (if the cash ISAs are held within a single ISA wrapper). For example, in the same tax year, you can have a TSB variable rate instant access cash ISA and a TSB fixed rate cash ISA. As not all ISA providers have this capability you should check with your provider whether they offer this choice. Regardless, you can keep multiple cash ISAs from multiple providers from previous tax years.
Is a cash ISA worth it?
A new Personal Savings Allowance (PSA) was launched on 6 April 2016, meaning all savings interest is automatically paid tax-free. Basic 20% rate taxpayers can earn up to £1,000 interest per tax year tax-free, while higher 40% rate taxpayers can earn £500 per tax year tax-free. Even though this is enough for many people, there are still good reasons why you should consider an ISA:
The interest you earn in an ISA does not count towards your PSA.
The interest earned in an ISA will always be tax-free.
You can build up your ISA balance over many years. So, while £1,000 tax-free interest from the PSA sounds generous now, it might not be in the future. Consider that, since ISAs were introduced in 1999/2000, you could have saved or invested more than £200,000 tax-free (not including interest or gains). While most people would not have been in a position to do this, it does show the effects of saving over a long period of time.
If interest rates go up in the future, you’ll use up your PSA quicker.
How to make the most of your cash ISA
Interest rates remain historically low, which has hit savers hard. However, to boost your returns, you could consider saving in a fixed rate cash ISA (sometimes known as a FRISA).
Fixed rate cash ISAs tend to pay higher interest rates compared to instant access accounts. The main difference is that you keep your money in the account for a fixed period, otherwise charges may apply for early withdrawals.
Put simply, you can have a nicer ISA with a FRISA.
How to transfer your cash ISA
To keep things simple or to make the most of your hard-earned money, you can transfer (i.e. consolidate) your cash ISA/s into a new cash ISA. For example, you may have several cash ISAs from previous years and wish to take advantage of, say, a fixed rate cash ISA with a higher interest rate. In this situation, don’t withdraw or close those old cash ISAs; doing so would lose their tax-free status and you wouldn’t be able to put it back in without using up your current ISA allowance. Instead, you should ask your new savings provider to transfer your cash ISA/s into a new one.
Even though interest rates remain historically low and the Government’s Personal Savings Allowance makes it easier than ever before to earn tax-free interest on your savings, it’s still worth considering ISAs as part of your overall savings and investments plan. This is especially the case if you’re looking to save for the long-term, as your ISA balance (along with the tax-free interest and/or capital gains) has the potential to keep growing.
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