Cash ISAs

A Cash ISA (Individual Savings Account) is just a type of savings account that is protected from income tax.  Just as with savings accounts, you have the option of having 'easy access' or you can choose to tie your money up longer for a higher return.

How Does A Cash ISA Work?

Most banks and building societies that offer and type of savings account will offer a Cash ISA.  In a nutshell, you pay money each month, the bank adds interest to the account, no tax is taken, you take money out and then spend it tax free.

Question: How much can I save each year into a Cash ISA?

Answer: This can change each year, but the maximum figure for the 2010/2011 year is £5,100.  This is subject to you not having paid more than £5,100 into a Stocks & Shares ISA as your total ISA allowance is £10,200.  For an ISA, the year starts on April 6th and ends on April 5th the following year.

N.B. this does not mean you cannot have a Cash ISA balance of more than £5,100 but you cannot add more than £5,100 of fresh money into it.

If you do not use your full allowance for the year, you cannot 'roll it over' to the next year: your allowance is reset on April 6th. Also, once money has been withdrawn it cannot be then replaced later in the year. For example:

- You pay in £5,100 at the beginning of the tax-year
- You withdraw £1,500 at Christmas with a plan to replace the money in February
- This is not allowed as ISA money once paid into the account cannot be replaced

If you need access to cash it is important to only use your ISA savings as a last resort, i.e. if possible withdraw money from other accounts first.

Another feature of an ISA is that you can usually transfer any money you have built up in an ISA from one bank to another without penalty.  This is especially useful if for example, you have come to the end of a good fixed rate term and the interest rate has fallen - you can move it to another deal or provider that offers a better rate of return.

Pros & Cons of a Cash ISA

Pros

• You can save at least 20% on any interest earned (more of you're a higher rate tax payer).  For example, if a cash ISA was paying 4% annual interest, a basic-rate (20%) taxpayer would have to find a non-ISA account paying 5% to get the same return after tax.  For higher rate (40%) tax payers, a non-ISA acount would need to pay 6.7%
• They're quick and simple to open, either online or in a high street bank or building society
• Easy access, unless you opt for a 'notice' account
• Very safe, unlike Stocks & Shares ISAs which can go up and down in value
• Flexible - you can usually transfer ISA accounts between providers without penalty (after a fixed term or notice period if applicable)
• You can start saving from the age of 16
• With larger sums of money held in ISAs for a long periods of time, where compound growth has really had a chance to work, the tax savings can be very significant - see ISACO Liquid Millionaire

Cons

• The maximum you can pay in to a cash ISA is capped and you cannot exceed your annual allowance
• Not all accounts accept transfers in and often those offering the highest interest rates are only available for this year’s allowance. You therefore need to bear this in mind when comparing products.  Extra care should be taken when moving money from one ISA provider to another. If you withdraw money from an ISA, it loses its tax-free status
• You can transfer money from a Cash ISA into a Stocks & Shares ISA but not the other way round ie. money in stocks and shares can’t be moved into cash

N.B. visit our tax tables page to find out what the current tax limits are on ISAs

Useful Links

>>> Learn more about Stocks & Shares ISAs
>>> Learn more about other Savings Account
>>> Savings Enquiries
>>> Compund Interest Money Calculator - how your money can grow in an ISA
>>> Free Newsletter: receive money saving tips and more
>>> Learning Zone: savings
>>> Increase my income so I have more money to save
>>> Saving Questions & Answers