My finances

Cash ISAs

What is a Cash ISA?

A cash ISA, or individual savings account, is a savings account that pays interest on your savings tax-free. Everyone over the age of 16 in the UK has an ISA allowance of £15,240 for the 2016/17 tax year. This can be split across savings in a cash ISA or a stocks & shares ISA in whatever proportion you like. Your ISA allowance resets on 6 April every year at which point any unused allowance from the previous tax year will be lost. The future interest earned on savings already in your ISA at this point will also be tax free as long as you keep them in your ISA.

The ISA limit is an individual one, an ISA can only be held in one name, joint ISAs are not available. In addition, whilst you can hold more than one ISA, you can only pay into one of these each year. This applies for both Cash and Stocks & Shares ISAs.

Why invest in a Cash ISA?

As we’ve already mentioned, any interest earned in a Cash ISA is tax-free. If you save cash in a bank or building society account then the interest you receive will be net of tax ie the tax man will already have taken his chunk before the interest is credited to your account. For a basic rate taxpayer this means that you will pay 20% of your interest to the tax man and this increases to 40% for higher rate tax payers. If instead you held you cash savings in an ISA you would pay no tax on the interest.

Let’s consider what you would get if you earned £100 interest on your cash savings in an ISA compared to a bank or building society account:

Bank/Building Society
Higher rate tax (40%)

£60

Bank/Building Society
Basic rate tax (20%)

£80

Cash ISA
All tax bands

£100

This said, you should consider the rates available on other savings accounts to check you aren’t missing out on a better deal elsewhere even after taking into account the tax savings.

There are some changes coming into effect from April 2016 which mean that all basic rate taxpayers will get a tax free savings allowance of £1,000. This may mean that their tax status will be the same whether or not they invest in a Cash ISA but there remain other advantages of investing in a Cash ISA.

Making Cash ISAs work for you

To get the best out of your cash ISA, you need to make sure you’re always getting the best rate possible. Most Cash ISA providers will offer a high introductory rate to attract savers but this often drops to a less attractive rate after a year eg 0.1% - which is next to nothing (even after allowing for the tax saving)!

To make sure you’re always getting the best rate on your cash ISA, follow this simple process:

Best deal:
  • Search the market for the best deal
Transfer:
  • Transfer your money if new deal is better
Save:
  • Save some more if you can afford to
Review:
  • Make sure you're still getting a good deal

Best Deal

There are lots of price comparison websites you can use to find out about the best Cash ISA deals.

If you don’t think you’re going to need your money for a while, you may be able to get a better interest rate if you agree to making no withdrawals for a “fixed” period. You can still access your money if you really need it before the end of the fixed period, but you will probably lose any interest due. Alternatively, if you will need access to your Cash ISA savings on a regular basis, you may be better off with an ‘easy access’ Cash ISA which allows you to withdraw the money whenever you like.

Most Cash ISA accounts will provide an "introductory" or "bonus" interest rate. This means that the interest rate you get will reduce to a lower rate at the end of the “introductory” or “fixed” period. You should set yourself a reminder before any such rate is due to expire so you can review the market and move your Cash ISA to the best rate available.

If you have any old Cash ISAs, then check if you are allowed to transfer them into the new Cash ISA too (see below).

Transfer

If you have any old Cash ISAs from previous tax years, then you can transfer these into your new Cash ISA account without using up your ISA allowance. This means you can get the best rate on all of your Cash ISA savings (as well as keeping life simple and only having a single Cash ISA account to keep track of).

To make the most out of your Cash ISAs, find a better rate and transfer your old Cash ISAs as soon as the "introductory" interest rate runs out. This is called being a RATE TART. You want to avoid any period where you are getting a very low interest rate on your money.

To do this you’ll need to find an ISA provider who accepts transfers. You’ll then need to fill out an ISA transfer form and send this to the new provider, from there, they will do all the leg work for you. Following this process ensures you retain your ‘tax-free’ status on the savings in your old ISAs.

WARNING!

You should NEVER withdraw your ISA savings with a view to then reinvesting them with your new provider as you will immediately lose all the tax benefits and, when you reinvest this money, it will eat into your new ISA allowance. Instead speak to your new provider and follow their transfer process.

Save

For the 2016/17 tax year, every adult can save up to £15,240 into an ISA. This can be split between a Cash ISA and a Stocks & Shares ISA in any proportion.

It’s always a good idea to have some “short-term” savings. These can be used for lots of things:

  • Emergencies (car breakdown, new washing machine etc)
  • Lose job (tide you over until you find a new job)
  • Bargain (gives you flexibility to go for any bargains)

Many people try to have enough rainy day saving so they could live for a short period, say 2-3 months, without any other income.

Overtime, you can get ALL your cash savings into a Cash ISA (assuming this is the most cost effective way for you to save).

Review

Make a note of when your "introductory" period runs out. Mark it in your diary or smartphone. At that point, use the price comparison websites again to find out what the best deals are and start the process again.

It can seem like a lot of hassle. But, if you have £10,000 of savings, every year you have a choice.

This year do you want £300 interest on your money or £10 interest?

That's the difference between a 3% interest rate and a 0.1% interest rate. So, don’t let the banks get away with giving you a low interest rate! Be a RATE TART!

Is it worth the hassle to transfer?

Seen a better deal elsewhere? Use our simple modeller below to work out how much you might make in a year from moving your money - then you'll know if it is worth the hassle.

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Gain from switching: (each year) £0.00