Why cash ISAs are your ticket to tax free savings.
What is a cash ISA?
Cash ISAs are savings accounts that pay interest on your money without deducting tax.
For basic tax payers investing in the best cash ISA you can find could increase the interest return on your savings by 20% while this figure increases to 40% or even 50% for those taxed at a higher rate.
There are a huge number of fixed rate cash ISA and instant access cash ISA options available so, just like regular savings accounts, you can find top Cash ISA rates that work with the way you use your money.
Who can save?
Cash ISAs are available to all UK residents over the age of 16. Crown employees working overseas but paid by the government (such as members of the armed forces) and their husbands, wives or civil partners are also able to take advantage of the tax free savings opportunities that ISAs provide.
How much can I save?
The current cash ISA limit specifies that you can now invest up to £5,760 in a Cash ISA during the 2013/2014 tax year. This increased from a cash ISA allowance of £5,640 for the previous 2012/2013 tax year on 6th April, 2012.
However, cash ISA rules state that you are only allowed to pay into one Cash ISA per tax year even though you can contribute to different Cash ISAs in different tax years.
Prior to the 6th April, 2008, Cash ISAs were available either as Mini Cash ISA accounts, or as cash components of Maxi ISAs. However, to make tax free savings more accessible the Mini/Maxi distinction has now been scrapped and all existing Mini Cash ISAs, TESSA-only ISAs and cash components of Maxi ISAs’ are now simply referred to as ‘Cash ISAs’.
Can I access money in a Cash ISA?
Yes, just as with other savings accounts, if you have an instant access ISA you will be able to withdraw money whenever you need to. Fixed rate Cash ISAs on the other hand tend to restrict your access for an agreed period with an interest penalty imposed for early withdrawal - in this way they can be described as tax free bonds.
However, it’s worth bearing in mind that irrespective of the type of tax free savings account you hold, you will only able to pay in a maximum of £5,760 for the 2012/13 financial year no matter how much you withdraw.
For example, if you start the tax year by paying in the full £5,760 but later withdraw £1,000, despite the fact that you now only hold £4,760 in your Cash ISA, you will not be able to pay in any more until the next financial year as you have already used your full £5,760 allowance.
Can I transfer my Cash ISA?
It is possible to transfer Cash ISAs from previous years allowances into a new Cash ISA account. However, you will need to do this officially with the help of your bank or building society (rather than simply withdrawing the cash) to protect your money from losing its tax free status. Regardless of whether you're switching from HSBC to Halifax or Santander to NatWest, or any other bank, your ISA manager should be able to arrange a transfer that protects your ISA allowance.
It’s now possible to transfer funds held in Cash ISAs to an Investment ISA without losing any of the tax free benefits. However, you are still unable to move monies held in Investment ISAs into a Cash ISA account.
What types of cash ISA accounts are available?
Cash ISAs can be broadly split into two categories, fixed rate cash ISAs and instant access ISAs. However within these labels Cash ISAs vary hugely in both the interest rates and the level of access they offer so it’s always important to compare cash ISA rates and familiarise yourself with any terms and conditions of the best cash ISA deals before signing up.
Fixed term Cash ISAs are usually offered at the start of the new tax year and often require that either the full £5,760 allowance be invested on account opening or another substantial amount, and then held for a specified period. These types of accounts do tend to offer the best cash ISA interest rates on the market and so can be a good option if you have a larger amount to invest and don’t need access to your money.
Instant access Cash ISAs allow you to withdraw available funds without notice or penalty. However it is important to remember that once funds have been withdrawn from a fully subscribed ISA they can't be returned in the same tax year.
If you carry out a cash ISA rates comparison and are willing to move your money in order to secure the best cash ISA rates available it is still possible to get a good return on your instant access cash ISA savings.
Cash ISAs which have been government approved are referred to as ‘Stakeholder Cash ISAs’ and, as well as allowing unlimited withdrawals, these will also have a low minimum opening amount, offer free transfers between compliant providers and offer an interest rate no lower than 1% below the Bank of England base rate. However, despite the security and reassurance they offer you may find that they aren't always the best interest rate ISA accounts available in terms of the cash ISA rates on offer.
As such it's really important to carry out a cash ISA comparison before you open an account, checking to see how the best Cash ISAs compare in terms of Cash ISA best rates, whether there are any guarantees or bonuses backing the Cash ISA interest rates and if any restrictions are placed on access to your savings. This is the safest way to make sure that you get the best Cash ISA rates for your circumstances every time.
For more advice on how to make the most of your Cash ISA allowance read our article Making the Most of Cash ISAs.
Other useful resources for cash ISA rates:
HMRC - ISA FAQs, direct from the taxman
- DirectGov - free advice from the government on ISAs and savings
- Wikipedia - encyclopedia information on Individual Savings Accounts
- Citizens Adivice - free information and guidance on ISAs
