Cash ISA guide

Savers can choose from fixed rate or easy access cash ISAs, with providers offering different rates across the market.

Although we can only pay into one cash ISA at a time, we can hold several from different providers and combine them together if we wish.

However, transferring an ISA must be managed carefully to ensure the money does lose its tax-free status.

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What are cash ISAs?

ISAs are the most tax-efficient way to save, with cash ISAs still the most popular way type of ISA.

Customers can choose from:

• Easy-access cash ISAs (the money can be withdrawn quickly)
• Notice cash ISAs (the money can be withdrawn with a certain period of notice)
• Fixed-rate cash ISAs (the money is locked away for a set period of time)

One of the major benefits of cash ISAs is that the money (up to a maximum deposit each year) is not subject to tax.

Plus, the money invested from one year to the next remains tax-free as long as it's kept in some form of ISA - no matter how long it's been there.

When the next tax year comes around, holders can add another lump sum - and the following year they can do the same again, slowly building up a tax-free nest egg.

It's important to note that, while we can hold different cash ISAs from different providers, we can only pay into one active ISA per year.

Although the shine has been taken off ISAs somewhat by the introduction of the Personal Savings Allowance (PSA), under which taxpayers can earn up to £1,000 in interest on their savings without paying tax, ISAs remain a vital saving tool for many.

Government data shows that there were almost 10 million cash ISAs accounts open in 2019/20, and there was almost £50bn held in cash ISA accounts at the same time.

Other types of ISA

Although cash ISAs are the most common type of ISA, there are other options for customers depending on their needs.

They can choose from:

• Stocks and shares ISA - These have potentially higher returns than cash ISAs but come with more risks.
• Lifetime ISA (LISA) - These are available to those aged between 18 and 39 and allow £4,000 to be put away annually to save for a house deposit or retirement.
• Innovative Finance ISA - These are investment peer-to-peer ISAs, against with risks involved.
• Junior ISAs - These are available to under 18s and come with a £9,000 annual tax-free allowance.

For most savers, a cash ISA that does not come with the risks involved with stocks and shares ISAs is usually the default choice.

A customer can hold different types of ISA at the same time, and they can save in a cash ISA alongside investing in a stocks and shares ISA or Innovative Finance ISAs.

Current ISA allowance

The Government places limits on how much money we can put into ISAs each year to ensure they aren't missing out on too much tax.

The ISA limit for the 2022/23 tax year is £20,000, unchanged from 2021/22 - but still much higher than it was quite recently.

Before July 2014, the limit was much lower - £5,760. It changed following the March 2014 budget and increased to £15,000 before being raised to the £20,000 limit in 2017/18.

The full ISA allowance can be used in several ways:

• All in cash savings
• All in stocks and shares
• All in an Innovative Finance ISA
• Split between cash, stocks and shares, and /or the IFISA in any proportion

As it's the most accessible form of ISA, this guide focuses on how to best use an ISA wrapper to protect cash from tax.

All investments must be made by the end of the tax year, April 5th.

Cash ISAs can be transferred from one provider to another, but there are specific rules to follow as we discuss below and in more detail in our guide to transferring a cash ISA.

Find out more: ISA FAQs

ISAs have been around since 1999 and most of us will have heard of them, even if we haven't used them to save.

However, there are still some misconceptions about cash ISAs, especially since the introduction of different types of ISAs we can access.

Can I access cash when it's in an ISA?

One of the most common misconceptions about ISAs is that once the money goes in, it can't be touched again.

With an easy access ISA at least, however, that's not true. In fact, many ISA accounts allow holders to withdraw money as often as they like, and those withdrawals won't change the account's tax-free status.

Since autumn 2015, the rules on withdrawing and reinvesting in an ISA have changed, making them slightly more flexible, and much kinder towards people who need or want to make withdrawals.

It means we may be able to withdraw cash and put it back during the same tax year without reducing our allowance for the current year - as long as the cash ISA is a flexible one.

The Government's own example of what this means with a £20,000 annual ISA allowance explains:

1. An individual puts in £10,000 during the tax year but takes out £3,000
2. With a flexible ISA, they can put £13,000 into that ISA before the year ends
3. Without a flexible ISA, they can put £10,000 into that ISA before the year ends

This means we don't miss out if we need to withdraw money quickly to replace something urgently. If we put it back into a flexible ISA before the year ends, we don't lose any of our allowance.

As complicated as it seems, though, the ISA system is still a lot simpler than many other savings accounts and far more rewarding.

Can I have more than one cash ISA?

There's a limit of one cash ISA with one provider during one tax year.

However, since savers can open a new ISA every year, they could end up holding several ISAs from several providers.

It's important to note, though, that an ISA provider isn't for life: even allowances put away a few years ago can be moved to an ISA with a better rate of interest and remain tax free.

That's why transferring to another ISA to get a higher interest rate can be a useful thing to do every couple of years.

Are ISAs safe?

Like all standard savings accounts, standard cash ISAs are protected under the Financial Services Compensation Scheme (FSCS).

The FSCS protects savings of up to £85,000 for every individual at each single institution.

While that covers most of the money most people will have, it could pose a problem for loyal types who are thinking of opening an ISA at a bank or building society where they already have a hefty chunk of savings.

There's more on how to avoid that in our guide to the different banking groups in the UK.

What about stocks and shares ISAs?

Most people focus on cash ISAs first because stocks and shares are usually intended as a longer-term investment; they're certainly more complex.

Stocks and shares ISA account holders may find it more difficult to freely withdraw their savings; the option is best suited to those who can afford to put their money away for at least five years.

In addition, since the stock market can fluctuate, there is no guarantee of the money invested growing, unlike the cash ISA.

But those willing to take the risk could well see far greater returns than a cash ISA would ever offer, especially considering the poor interest rates we've seen for several years now.

Is there a minimum age for ISA holders?

To have a cash ISA, customers must be 16. To hold a stocks and shares ISA they must be over 18.

Anyone under 16 can open a Junior ISA, however.

What about Junior ISAs?

Junior ISAs (JISAs) replaced the Child Trust Fund (CTF) in November 2011 and families have been able to transfer money that was stuck in CTFs since 2013.

They have a lower investment limit - £9,000 for 2022/23 - and a child can have a maximum of one cash JISA and one stocks and shares JISA - but otherwise they're very similar to adult ISAs, and the information on choosing and transferring accounts below will apply to them.

The accounts are less popular than cash ISAs, partly because people are less likely to know about them.

We've got more detail on how to transfer a CTF to a JISA for the decreasing number of children still holding the old-style CTFs.

Choosing a cash ISA account

As we've noted above, cash ISAs can pay some of the highest interest rates among any savings account on the market.

But, unfortunately, it's not as simple as looking for the highest number sitting next to a percentage symbol.

Easy access vs fixed rates

Broadly, there are two kinds of cash ISA accounts: easy access and fixed rate.

• Easy access cash ISAs: the most common type of ISA offers easy access to the cash stored there with penalty-free withdrawals for users (although subject to the rules discussed above).

However, these accounts tend not to offer the top rates, and their rates are variable - meaning the rate may change as the base rate changes, just like any other savings account.

• Fixed rate cash ISAs: those who like a more stable return on savings, and are willing to sacrifice the ability to make withdrawals without penalty, might want to consider a fixed rate account.

Fixed rate ISAs give holders added security against wider rate changes and drops in the market: the rate advertised is what you'll get.

The drawback, however, is that account holders won't have easy access to their cash.

Most institutions require anywhere from one to five years commitment to the investment, and will charge anywhere from 60-180 days in interest penalties for early withdrawals. As with any hard to access savings account, the longer people put their money away, the higher the rate they can expect.

There are also some notice cash ISAs around that allow customers to withdraw money from their ISA with a certain number of days' notice, but these aren't as common as they used to be.

The difference in cash

ISA rates have been lacklustre for several years, but there are signs they are climbing back up a little.

The gap between easy access and fixed rate deals are not always huge so, for ease, we've used the example of a 1.4% interest rate on an easy access ISA deal and a 2% fixed rate deal in the table below.

This demonstrates how that works out in actual cash over one year, assuming the amount in the first column is invested in the cash ISA at the very start of the year and that the account continues receiving the same rate throughout the whole period:

Those who can afford to lock away a portion of their money and be sure that they won't need to make a withdrawal can earn the most interest.

However, as we noted with the withdrawal rules above, and with the Personal Savings Allowance earlier in this guide, this shouldn't mean shunning ISAs altogether.

Because of the PSA, some of the standard savings accounts - and even some current accounts - can more than hold their own with a brand new ISA started completely from scratch.

The following two tables assume the amounts invested are deposited at the start of the tax year, and that the interest rate remains the same for the rest of the year.

But should we be in the situation where tax may be an issue - which isn't that far off for anyone who can save £15,000 a year - investing in an ISA is the best way to ensure we benefit from all the interest our money is earning.

Interest rewarded when tax is payable

There are current accounts with decent amounts of interest - but they have caps in terms of the balances that can earn interest - and they're subject to tax.

The transfer process

Once savers have chosen their perfect cash ISA, there's the small matter of getting their cash in there.

New ISA customers can either move cash from a current or other savings account to the newly opened ISA or, in the case of an ISA they already own, transfer the amount from one ISA to another.

The first option is pretty simple. Just follow the provider's process for adding money to the account, bearing in mind the limits and rules on withdrawals we talked about in the section above.

The second option is a little more complicated.

Three transfer rules for cash ISAs

If we do decide to transfer or combine ISAs, it's crucial we follow the right process or we could lose the tax-free benefits we've accrued.

1. Don't just withdraw, then reinvest, the cash. Use the transfer process: taking cash out of one ISA and putting it into a normal savings or current account before moving it to another has two results.
   Firstly, it's liable for tax, so it'll affect how much tax the account holder will have to pay on that account that year. Secondly, it'll eat into the new ISA allowance.
   So, to reinvest an old ISA, use the new provider's transfer process instead.
   That means looking for an ISA that says it accepts "transfers in" in the small print and entering the details of the old ISA during the application process.
2. Watch for penalties: some ISA providers charge fees for transferring out, especially during the first year or so.
3. Only split up old ISAs: it's not a problem to transfer just some of the money from a cash ISA older than the tax year just gone into a new account.

Be careful, however. Anything opened in the current tax year can only be moved as a lump sum.

Learn more about safely transferring an ISA.

Summary: Effective way to save

Cash ISAs remain one of the best ways to save up to £20,000 per year without worrying about tax.

It's true that depositing money into a cash ISA has lost some of the unique tax benefits it previously had thanks to the introduction of the Personal Savings Allowance (PSA), plus the rates on offer right now are not generally spectacular enough to attract every type of saver.

However, using as much of the tax-free savings allowance provided by a cash ISA each year is still one of the financial options that makes the most sense.

Even putting the money in an easy access ISA will generate a little interest each year and, crucially, the pot will build up without incurring tax as long as it is left alone.

Savers considering cash ISAs should remember:

1. Up to £20,000 can be deposited into a cash ISA each year
2. No tax is levied on money held in a cash ISA account
3. You can only pay into one cash ISA each year
4. Money can be transferred from one ISA to another to get better rates
5. Cash ISAs can be held at the same time as stocks and shares or innovative finance ISAs

Ultimately, cash ISAs are a great way of getting into the savings habit, and it's a good idea to use as much of the annual allowance as possible.