The world of ISAs can be overwhelming — different types, rules and restrictions, and don’t get us started on all the financial jargon surrounding them.
But as we approach the end of the tax year, you’ll likely be starting to consider your options, with a cash ISA (Individual Savings Account) potentially on the cards.
The good news is that not only can you have more than one, an ISA offers the opportunity to save for your future while maximising on interest.
So should the prospect of a cash ISA intrigue, we’re here to help with the basics.
What is a cash ISA?
An ISA is a form of savings account, which differs from other options as it allows you to accumulate tax-free interest on the money you deposit.
Thanks to this, you can build your nest egg – up to a certain amount each year – without being taxed on the interest you rack up, or being charged capital gains tax like you would on standard investments.
As well as a cash ISA, there are three other main types of adult ISA to choose from: stocks and shares, lifetime (LISA), and innovative finance (IFISA).
Each of these comes with different stipulations and features, and will work best for different savings goals.
There’s also the junior ISA, which allows you to put away cash on behalf of your child for their future until they turn 18.
How much can you save in a cash ISA?
With a cash ISA specifically, you can save up to £20,000 per tax year, which runs from April 6 to April 5.
You can’t carry allowances over, but each year you get a new ISA allowance.
What are the advantages of a cash ISA?
Not only are cash ISAs exempt from income tax, any interest you earn in one doesn’t count towards your personal savings allowance.
Other key benefits of a cash ISA include easy access to your money, the ability to transfer funds to a different provider, the fact that they’re relatively risk-free compared to other options, and that they’re covered by the Financial Services Compensation Scheme (FSCS), protecting you up to £85,000.
There are a variety of cash ISA subcategories available too, depending on your needs.
An instant access cash ISA allows you to withdraw money as and when required, a regular savings cash ISA allows you to save a fixed amount each month, and a fixed-term deposit cash ISA pays higher interest if you’re prepared to keep your savings locked in for a set time frame.
How many cash ISAs can you have?
As of the start of the 2024/25 tax year, there is no limit on the amount of cash ISAs you can open with different banks or building societies.
This excludes lifetime ISAs, because while you can hold multiple lifetime ISAs, you can only pay into one per tax year.
You should know however, that the total amount of money you deposit across all of your ISAs cannot exceed your ISA allowance – in this case, £20,000.
A recent change in rules means you can partly transfer funds, but you should check if your provider offers this. Prior to the 2024/25 tax year, if you wished to transfer your money to another ISA, it would’ve had to be the full amount.
What are the drawbacks of a cash ISA?
Cash ISAs are typically billed as a win-win but – as ever when you’re handling savings – it’s important to be fully aware of the pros and cons.
Depending on interest rates, you may be able to earn more through a standard savings account, as these also allow you to earn £1,000 of tax-free interest annually (or £500 if you’re a higher rate taxpayer).
Managing your cash ISA is also dependent on your provider and whether they permit transfers. Sometimes, there will be exit fees.
Additionally, fixed-rate ISAs keep your money locked away for a certain period of time. Should you need to access the money before this period ends, you might have to pay a penalty charge.
There’s no one-size-fits-all option when it comes to savings, so whether a cash ISA is right for you will depend on your specific needs and goals.
Before you make any financial decisions, weigh up your options, looking at factors like how much you could earn and the features each account offers.
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