logo-rebrandphone Skip to main content

What is a cash ISA? Top ten ISA questions answered

What is a cash ISA? What is the cash ISA allowance? How many ISAs can you have and how much can you earn before paying tax? We answer ten of the most common questions about ISAs.

What is a cash ISA? Top ten ISA questions answered

ISAs are popular as a tax-free savings option, but what is the cash ISA allowance, how do they work, and how much can you earn before paying tax?

Are you earning enough interest?

It could be time to find a new savings account, find and compare ISAs with our partner money.co.uk

What is an ISA? Is it the same as a savings account?

An ISA or Individual Savings Account is different to a normal savings account, because it allows you to save without paying any tax on the interest you earn.

However, as of April 2016 the first £1,000 (£500 for higher rate payers) of interest you earn in any account will be tax-free.

Are there different types of ISA?

Yes. There are cash ISAs, which are best for people looking for low-risk savings, and stocks and shares ISAs, which tend to be better as a longer term investment.

With both cash ISAs and stocks and shares ISAs there are plenty of different account options to suit different needs.

What is an ISA allowance? How much can you earn before paying tax?

The annual ISA investment allowance is £20,000 for the 2019/20  tax year, which runs from April to April the following year. The allowance can be split between cash or invested in stocks and shares.

There is no limit on how much you can earn in interest before paying tax, but note that for stocks and shares ISAs you will likely need to pay tax on any dividends you receive.

It's also worth noting that the ISA allowances tend to change every few years, so keep an eye on the news to see if you could deposit more.

Can anyone get an ISA?

To have a cash ISA, you need to be 16 or over and be resident or ordinarily resident in the UK. To have a stocks and shares ISA, you need to be 18 or over.

What happens if I want to withdraw money from my ISA?

Many cash ISAs are easy access, and it is easy to withdraw your money if you need it or transfer it to another account. However, with fixed rate ISAs you may be penalised if you want to withdraw your savings before the end of the fixed rate period.

Bear in mind that if you take your money out, you will not be able to pay it back in again, because of the £20,000 savings limit on ISAs.

For example, if you paid £20,000 into your cash ISA, then withdrew £200, you could not pay that money back in at a later date, because you would already have met the contributions limit for that tax year.

Making the most of your cash ISA allowance

Try to secure the best interest rate you can - fixed rate deals are a good bet, particularly if the base rate continues to fall.

Be wary of ISAs with an introductory interest rate - these may look appealing, but always check that the standard interest rate is competitive too. Also check that you can transfer in your ISA allowance from previous years, as not all ISA accounts allow you to do this.

To get the best return on your money, try to invest as much as you can afford early on in the tax year, to make sure you earn as much interest as possible.

Is my money safe in an ISA?

With stocks and shares ISAs there is an element of risk - there is always a chance that the equities your ISA invests in could fall in value, rather than rise. With a cash ISA, just like a normal savings account, the value of your initial investment cannot decrease.

Both cash ISAs and stocks and shares ISAs are covered by the Financial Services Compensation Scheme, meaning that if your bank were to fail, your savings would b covered, up to a limit of £85,000 cash or £50,000 for investments (£100,000 for joint accounts). Find out more about safe savings.

Should I swap my ISA for a savings account that pays a higher rate of interest?

While there may be some savings accounts around that offer a higher rate of interest than your ISA, remember that the interest you earn on your ISA savings is tax-free and only the first £1,000 (or £500) of interest you earn in a normal savings account will be.

Also, as your ISAs will accumulate each year you could end up earning pretty decent amounts of interest on the deposits. For, example if you'd put in the full amount every year since ISAs were introduced you could have well over £100,000 plus interest (or share equity gains).

If I'm not getting a good rate, can I transfer my ISA?

Yes - it is simple to move your balance from the current tax year into an ISA paying a better rate.

However, if you want to move your balance from previous tax years, it is vital that you arrange an ISA transfer, rather than withdrawing your money and paying it into a new ISA account, otherwise you will lose your tax-free benefits.

Bear in mind that not all ISA accounts will allow you to transfer in your ISA balance from previous tax years, so always check whether you can transfer your balance. Find out more about transferring your ISA.

How do I find the best ISA?

Make sure you shop around to find the best ISA for you. We've teamed up with Money.co.uk to offer a comparison service that makes it quick and easy to compare ISAs.

You can refine your results by interest rate, how much you have to save, how long you want to save for and the withdrawal notice period, to find the ISA that fits your needs.

Are you earning enough interest?

It could be time to find a new savings account, find and compare ISAs with our partner money.co.uk