Cash ISAs

A Cash Individual Savings Account (ISA) is a type of tax-free savings account. There is no tax to pay on any interest earned, making them especially attractive for tax payers who are already fully utilising their Personal Savings Allowance (PSA) – and in particular high and additional rate tax payers. 

How does a Cash ISA work?

You can contribute up to £20,000 per tax year into ISAs. You can spread your contributions across different types of ISAs, or contribute all of your annual allowance into one type, such as a Cash ISA. From the start of the 2024/25 tax year, you can now subscribe to more than one of each ISA type per tax year. So you could open an easy access ISA and a Fixed Term ISA, but you’d need to check that the provider will allow this. Although the rules have been changed, the savings providers do not have to accept these changes, so it’s still important to check what you can and cannot do.

ISAs are the first place that many people should look to put their cash when they are planning their finances, after all when the Government is giving you a tax break, you should grasp it with both hands.

However, as they have increased in complexity, many struggle to understand the different types of ISA available, how much they can subscribe and when.

What are the pros and cons of a Cash ISA versus a 'regular' Savings account?

One aspect of Cash ISAs that is regularly criticised, is that the rates on the top ISAs are often far lower than the ‘before tax’ rate of the top fixed rate bonds.

The gap between best buy standard accounts and cash ISA equivalents really became more of an issue following the introduction of the Personal Savings Allowance (PSA) in April 2016. At that point the Government announced that 95% of savers would no longer pay tax on their savings accounts, as the interest they earned would be less than the PSA of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. As a result, cash ISAs seemed to fall out of favour with savers and providers alike and rates started to suffer.

But the good news is that this gap has narrowed more recently and in any case it’s about what you can earn after tax has been taken into consideration that’s important.

Whilst the ISA rates look as though they are paying less than the bonds, especially on the fixed term accounts, you need to consider what the after-tax rate would be on a bond, if you are already fully utilising your Personal Savings Allowance and therefore pay tax on your savings. For example, if the top fixed term bond rate is paying 4.80% AER, after the deduction of basic rate tax, the net rate is 3.84% - so on £20,000 you would take home £768. Therefore if the equivalent ISA is paying a little less, you still could earn more.

If the ISA is paying 4.50% for example, as this interest is tax free, you’d take home £900 instead!

Another benefit of fixed term Cash ISAs over bonds is that you can access the money within the term of the ISA, albeit normally with a hefty penalty. With the vast majority of fixed term bonds, there is no access allowed until maturity, except on death.

The key drawback of ISAs is simply the restriction on the amount that can be deposited each year. The allowance has been £20,000 since April 2019, and is set to remain at this level until at least 2030. 

What are the types of Cash ISA?

Cash ISAs are simply tax-free savings accounts, so come in all shapes and sizes, such as easy access, notice accounts or fixed term products or even regular savings cash ISAs. The key is that any interest earned is tax-free and does not count towards your Personal Savings Allowance (PSA).

How many Cash ISAs can I open?

From the start of the 2024/25 tax year, it is now possible to make multiple subscriptions to the same type of ISA in one tax year, with the exception of the Lifetime ISA (LISA). This means you can now subscribe to more than one Cash ISA in any tax year but all subscriptions must remain within the overall ISA limit of £20,000. 

What interest rate can I get with a Cash ISA?

Take a look at our Best Buy tables  for the latest rates.

What is a portfolio cash ISA? 

Some providers have developed what is known as a portfolio ISA facility, which means that savers can open more than just one cash ISA with the same provider in the same tax year. But, not all providers offer this facility, so it's important to shop around and check what is on the market. 

What is a flexible ISA  

Rule changes have been made when it comes to how you can use the money in your ISAs. Previously, if you withdrew money from an ISA, you could not put that money back into it without it counting towards your annual ISA subscription amount.  

Now, you can take money out of your ISA at any point, providing it is a Flexible ISA, and replace it within the same tax year into the same ISA. This applies to historic ISAs as well as the one you are saving into for this tax year specifically.  

For example, if you have £50,000 in a flexible ISA, including £5,000 of this tax year’s allowance, you still have £15,000 that you can add to the ISA within this tax year’s limits.  

If you need to withdraw £15,000 in the meantime, you will be able to add that back into your flexible ISA, plus the remainder of this year’s allowance – so up to £30,000 – as long as it is within the same tax year as the withdrawal.  

Not all ISAs are flexible – it is up to the providers whether they offer this as part of their product or not and there are specific rules on how the withdrawals have to be transacted (withdrawals have to be transacted as cash, meaning that any investments held have to be sold first) – so you should check before you make any withdrawals to see what the rules are with your provider. 

Transferring a Cash ISA

As with any other savings account or investment, it makes sense to regularly review your ISAs to make sure you are still in the best place. But if you do decide to move any of them, you need to be aware of a golden rule.

Unlike a normal savings account, if you find a better option you must not close your account in an attempt to move the money. Instead, you need to undertake an ISA transfer. 

You should, therefore, contact the ISA provider that you want to move your money to (beware, not all providers will accept transfers though) and ask them to start the process for you. They will then contact your existing provider and get the ball rolling.

Closing an ISA ends the tax benefits for the money you held in that ISA but transferring it to another ISA without closing the account is the way to ensure you retain the tax benefits on that ISA money.

Navigating the ISA maze can be challenging, with a number of rules and restrictions to be aware of and different options to choose between.

But, while complex at times, this stalwart of the savings market should not be dismissed out of hand, as you may find that you miss out on valuable tax-free income and growth as well as a government bonus in some cases both now and in the future.

For support about how to use ISAs in the best way why not get in touch and arrange a free initial consultation today. We can help you better understand your options and find solutions that suit your needs. 

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