Cash ISA

Cash ISAs are the most popular form of ISA in the UK. A Cash ISA is best described as a savings account where no tax is paid on interest earned.

 

1. What is a Cash ISA?

2. How does a Cash ISA work?

3. What is the Cash ISA allowance?

4. Can I transfer a Cash ISA?

5. Are Cash ISAs safe?

 
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What is a Cash ISA?

Cash ISAs are the most popular form of ISA in the UK. A Cash ISA is best explained as a savings account where no tax is paid on interest earned unlike a standard instant access savings account.

There is no fee for opening a Cash ISA and they are a great way of earning tax free interest on your cash savings, because like all ISAs, they benefit from a tax-wrapper.

There are three variations of Cash ISA;

  • Instant-access
  • Flexible
  • Fixed-rate
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How does a Cash ISA work?

With a Cash ISA, you deposit your money (like you would with a traditional savings account) and it’s then able to sit and earn interest tax free. 

Instant-access, regular and fixed-rate Cash ISAs all work slightly differently. 

Instant-access Cash ISAs are fairly self-explanatory in that they allow you to access the funds in your cash ISA instantly, whenever you need to. 

A fixed-rate Cash ISA on the other hand requires you locking away your money for a fixed term in return for a fixed-rate of interest - this fixed-rate of interest will typically be higher than is available from an instant-access Cash ISA.

Finally, flexible Cash ISAs permit you to deposit, withdraw and replace funds in your Cash ISA within the same tax year without affecting your annual ISA allowance. For example, if you had deposited your full £20,000 allowance for the 2019/20 tax year into your Cash ISA, withdrew £10,000 of it and then later decided you wanted to put £10,000 back into your ISA, you could do so without exceeding your £20,000 ISA allowance - even though you would have technically deposited £30,000 that tax year.

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What is the Cash ISA allowance?

The Cash ISA allowance for the 2019/20 tax year is £20,000, this is the maximum that you can deposit into a Cash ISA and receive tax free interest on annually. You can only open one Cash ISA per year, however you can transfer your Cash ISA to a different provider, or to a different type of ISA e.g. a Stocks and Shares ISA. 

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Can I transfer a Cash ISA?

Yes, you can transfer a Cash ISA to a different provider, or to a different type of ISA. 

If you found a Cash ISA with a different provider that was more suitable for you - for example, because it had a better interest rate - you are able to transfer your current Cash ISA over to that provider (as long as they accept transfers). To do this, you must ask your ISA provider how to go about transferring to ensure your funds do not lose their tax free status. Your current Cash ISA provider must let you transfer to a new provider, but some providers will not accept transfers, so you must make sure that your preferred provider will allow you to transfer before agreeing to switch. 

You can transfer funds saved in the current tax year, as well as funds saved in previous tax years. If you’re transferring money saved during the current tax year, you must transfer all of it. However, if you’re transferring money saved during previous tax years, you can choose to transfer all or only part of it. You’re also able to transfer a Cash ISA as many times as you like, and any transfers are not governed by the annual ISA allowance. 

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Are Cash ISAs safe?

Cash ISAs are considered to be the safest form of ISA because, unlike with investment ISAs (Innovative Finance ISAs and Stocks and Shares ISAs), your capital is not at risk. 

Cash ISAs are also protected by the Financial Services Compensation Scheme (FSCS) - as long as you open your Cash ISA with a Financial Conduct Authority (FCA) authorised provider - meaning you get up to £85,000 of your money back if anything is to go wrong with your ISA provider. 

While Cash ISAs are generally very safe and your original savings are protected, fixed-rate Cash ISAs come with slightly greater risk. There’s always a chance that inflation might rise above the fixed-rate, so the value of the capital is eroded, or market rates might rise above the rate you are tied to, so you lose out.