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What is a Cash ISA and how do they work?

What is a Cash ISA and how do they work?

Learn what a Cash ISA is with our helpful guide that covers everything you need to know about.

What is a Cash ISA?

A cash ISA, short for Cash Individual Savings Account, is similar to a conventional savings account. However, its distinctive feature is the exemption from taxation on the interest earned.

In each UK tax year (which runs from April to April), you can deposit up to £20,000 into a cash ISA. Various types of cash ISAs are available, including fixed rate ISAs and variable rate cash ISAs.

ISA savings are in addition to the Personal Savings Allowance (PSA), which permits basic rate taxpayers to earn up to £1,000 in savings interest annually without incurring tax liabilities.

Higher rate taxpayers (40% tax rate) qualify for a reduced PSA of £500 per year, while additional taxpayers earning £150,001 or more do not receive any allowance.

Register your Cash ISA interest. ISA limits apply. £20k per tax year. Chip does not provide tax advice or financial advice. Tax treatment depends on individual circumstances and may be subject to change in the future.

How do Cash ISAs Work?

If you're thinking about using a cash ISA to grow your savings, here's a brief overview of how they work:

  • Cash ISAs are typically easy to open online or at a branch without setup fees.
  • You can save up to £20,000 annually, and your account accrues interest similar to a standard savings account.
  • A variety of cash ISAs are available, such as easy access, regular saver, fixed rate, and junior ISAs for individuals under 18.
  • Different ISAs may have varying terms, including withdrawal restrictions on fixed rate cash ISAs.
  • Transferring funds from previous tax years into a higher-yield ISA account is possible. Avoid closing an ISA when switching; instead, contact your new ISA provider to facilitate the transfer.

Interest Rates on Cash ISAs

The interest rate depends on the type of cash ISA and the chosen provider. Fixed rate cash ISAs offer a guaranteed return for a set period, whereas variable rate cash ISAs may change if the provider adjusts its interest rates.

Use our interest rates calculator to see how much you could earn. 

Cash ISA interest rates can vary between financial providers, so it’s always good to do your research with comparing Cash ISA rates. Here’s the current ISA rates from recognisable providers:

Cash ISA factors to think about

Before opening a cash ISA, consider the following factors:

1. Interest Rate: The interest rate determines your savings' returns. Be aware that initial high introductory rates may decrease after a year, so consider transferring your ISA funds to a higher-yielding account at that point.

2. Account Type: Choose between easy access, fixed, or regular saver ISAs based on your preferences for return and accessibility.

3. Alternative ISAs: Apart from cash ISAs, you can explore stocks and shares ISAs. These involve investing in the stock market, offering potential rewards but also bearing some level of risk.

4. Annual Limit: You can open only one cash ISA each year. Think carefully before selecting your cash ISA, keeping in mind that your total ISA savings can't exceed £20,000 in any tax year.

5. Deadline: The tax year concludes on April 5th. Any unused ISA allowance cannot be carried over, so invest before this date to maximise your tax-free benefits.

How Many Cash ISAs Can I Have?

You can have multiple ISAs, but you can open only one cash ISA in each tax year. If you've opened a cash ISA in the current tax year, you must wait until the start of the next tax year to open another. 

Be aware that transferring funds from previous years' ISAs does not count towards this limit.

Cash ISA Allowance

The annual limit for cash, stocks and shares, and innovative finance ISAs combined is £20,000 for the current UK tax year of April 6th 2023 - 5th April 2024. 

If you withdraw funds from your ISA (provided it's a Flexible ISA), you can replenish them without affecting your annual ISA allowance. Always check your specific ISA provider's terms, as rules can vary.

Cash ISA Rules

Cash ISA rules are straightforward:

  • You can open one cash ISA per tax year with a maximum deposit of £20,000.
  • Transfers from existing cash ISAs to new cash ISAs or splitting transfers among different providers are allowed.
  • To switch between cash ISA providers, you must request a transfer. If you withdraw the money yourself, you'll lose your tax-free allowance on the entire sum.
  • You can transfer money from a stocks and shares ISA to a cash ISA, but this requires a form to be submitted to the new provider.

Additionally, you can transfer money from a cash ISA to a Lifetime ISA to qualify for the government bonus.

Pros and Cons of Cash ISAs

Pros of cash ISAs:

  • Tax-free savings.
  • No risk of capital loss compared to stocks and shares ISAs.
  • Flexibility to transfer to higher-yield accounts while retaining tax advantages.

Cons of cash ISAs:

  • High interest rates may drop after the first year.
  • Fixed rate cash ISAs may lock your money for a set period.
  • Not all accounts accept transfers from previous years, and exit fees may apply.

Switching Cash ISAs

Switching could be considered if you find an account offering a higher interest rate. Ensure the new provider accepts transfers and inquire about any penalties for moving your funds.

You can transfer savings from both the current and previous years. It may also be possible to request a partial cash ISA transfer however not all providers can facilitate this.

However, if transferring funds from the current year's ISA, you must switch the full amount. From April 2024, the government will allow partial transfers of ISA funds in-year between providers.

Avoid closing the ISA, as this would result in losing the tax benefits. Instead, contact the new provider to arrange the transfer.

Register your Cash ISA interest. ISA limits apply. £20k per tax year. Chip does not provide tax advice or financial advice. Tax treatment depends on individual circumstances and may be subject to change in the future.

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