How does a cash ISA work?
You can only open and pay into one cash ISA each year. But everyone gets a tax-free ISA allowance per year (£20,000 for the 2021/22 tax year), which is how much you're allowed to put in.
Your ISA allowance can be split across different types of ISA. For example, you could have a cash ISA, a stocks and shares ISA and/or an innovative finance ISA – but you can’t put in more than £20,000 overall.
Because you can open one cash ISA each new tax year, over time, you might end up with several cash ISAs. But, remember, this doesn't increase your tax-free cash ISA limit. You can still only pay into one cash ISA each year.
The good thing to remember about having a cash ISA is that it is tax free for the entire time that your money is in there. That's why it's a good idea to use up your ISA allowance each year, if you have money to save.
Who will benefit from a cash ISA?
Cash ISAs were once an incredibly attractive prospect, as they were a way to get tax-free interest on your savings. In 2016, the Personal Savings Allowance (PSA) was launched. The PSA means basic rate tax payers can earn £1,000 interest per year tax free, and higher rate tax payers can earn £500 interest per year tax free. This has made cash ISAs slightly less appealing to most people.
However, if you’re an additional rate tax payer, you don’t get any Personal Savings Allowance, so a cash ISA can be a way to earn tax-free interest. Similarly, if you’re over your Personal Savings Allowance
Transferring money from one cash ISA to another
You can usually transfer funds into your cash ISA from a previous year's ISA account. As long as it's a transfer, it doesn't count as having more than one ISA. Not all cash ISAs let you do this, so double check whether yours does. Some charge a fee.
Many older ISAs pay low rates, so transferring can be a helpful way to access better rates. You can even consolidate all your old ISAs into one, and up the rate on all your ISA cash in the process.
If you transfer all your funds into one account, you'll only have one cash ISA to manage. But accounts that allow transfers might not give you the best cash ISA rates. You can search for the best cash ISA transfer accounts using our comparison table.
If you do transfer all your ISA cash into one ISA account, you may then have more than £85,000 with one financial institution. This means you wouldn’t be within the Financial Services Compensation Scheme limit of £85,000 per institution. Therefore you may not have the protection you need.
To do a transfer, ask your new cash ISA provider for an electronic transfer form. You shouldn't just withdraw the cash yourself to move it, because your money could instantly lose its tax-free benefits. It's crucial that you do it in the right way. It usually takes around 15 days for the transfer to complete. You can make a complaint if it takes longer, which may speed it up.
There are a few ISA accounts that let you withdraw and replace money during a tax year, without losing that amount from your allowance. That would mean that you could take out £1,000 (for example), and then replace it in the same tax year without it affecting your ISA limit. ISAs that allow this are usually called flexible ISAs. Check carefully whether yours has this feature before you withdraw cash.
Remember that you can't transfer an ISA to someone else.
