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 an ISA could increase the interest return on your savings by 20% while this figure increases to 40% for those taxed at a higher rate.
There are a huge number of fixed rate and instant access options available so, just like regular savings accounts, you can find a Cash ISA that works 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?
You can now invest up to £5,100 in a Cash ISA every tax year. (In the 2009 budget the Chancellor announced that the ISA limit would increase from £7,200 to a total tax free savings allowance of £10,200, £5,100 of which can be saved as cash - previously £3,600. This came into effect in October 2009 for those over 50 and in April 2010 for all other savers). However, 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.
However, it’s worth bearing in mind that irrespective of the type of Cash ISA account you hold, you will only able to pay in a maximum of £5,100 per financial year no matter how much you withdraw. For example, if you start the tax year by paying in the full £5,100 but later withdraw £1,100, despite the fact that you now only hold £4,000 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 £5,100 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.
From the 6th April, 2008, it’s now possible to transfer funds held in Cash ISAs to a Stocks and Shares ISA without losing any of the tax free benefits. However, you are still unable to move monies held in Stocks and Shares 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 accounts and instant access accounts. 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 familiarise yourself with any terms and conditions before signing up.
Fixed term Cash ISA's are usually offered at the start of the new tax year and often require that the full £5,100 allowance be invested on account opening and then held for a specified period. These types of accounts do tend to offer higher rates than their instant access counterparts and so can be a good option if you have £5,100 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.
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.
For more advice on how to make the most of your Cash ISA allowance click here
