Cash ISAs

How do they work?

You can open a cash ISA through various lenders including banks, building societies and some national savings and investment providers.

You can only open and put money into one cash ISA each tax year, which runs from 6 April to 5 April the following year.

There’s also a limit on the amount of money you can pay into an ISA each tax year, which is set by the government. This deposit limit is currently £20,000.

Most importantly, any cash you put into an ISA stays tax-free for as long as it’s in there.

How do I open a cash ISA?

It’s easy and straightforward to open an ISA.

You’ll need to provide some proof of identity and your address. There may be a minimum deposit amount to open the account, but not always.

You can open most cash ISAs online, over the phone or by going into your local branch.

Remember that rates on cash ISAs can vary so it’s worth shopping around and comparing options first.

What kinds of cash ISAs are there?

The main types of cash ISA are:

Easy access cash ISAs - Also known as instant-access cash ISAs, this will let you withdraw money without paying a penalty. They usually come with variable interest rates, which means the rate can go up as well as down

Fixed-rate cash ISAs - Offering a fixed rate of interest over a set period, this type of ISA requires you to commit to locking your money away in return for a potentially higher interest rate. But you’ll usually be charged if you want to withdraw your money early

Regular saver cash ISAs - This type of ISA usually pays a higher rate of interest that’s fixed, if you put away a regular amount each month for a set time. Generally, there’s a minimum and maximum amount that you can deposit each month

Lifetime cash ISAs - This is a product designed by the government to help people under 40 save for their first home or for retirement. You can deposit up to £4,000 each year and the government will add a 25% bonus on top of your savings. It has a fixed rate of interest

Some lenders will also allow you to split your money between a variable rate and a fixed-rate cash ISA in the same tax year, using what’s called a single cash ISA portfolio. So, you’ll still only be able to deposit £20,000 per year, but it can be spread between different products.

Withdrawing your money from a cash ISA

Some ISAs are designed for you to be able to withdraw money when you need it, like the instant-access cash ISA.

With a fixed-term cash ISA, you’ll deposit your money during the term and once it has finished you can withdraw it or switch to a new ISA.

But if you withdraw the money before the end of the fixed term, you’re likely to be charged, which could be a whole year’s worth of interest.

The good news is that when you withdraw money from your cash ISA, you won’t need to pay income tax or capital gains tax.

Can I transfer between a cash ISA and a stocks and shares ISA?

Yes, you can transfer your money between all types of ISA and you can choose to transfer some or all of your ISA balance.

If you’ve got more than one ISA, you can also combine them into one new ISA.

You’ll need to use an ISA transfer service to make the switch. This prevents the money you’ve saved in previous tax years from counting towards your current tax-free allowance.

For example, you could transfer £12,000 of your ‘old’ cash ISA savings into a new stocks and shares ISA and still add up to £20,000 more in that tax year.

Inheriting cash ISAs

If your spouse or civil partner passes away, you should be able to inherit their ISA savings through what’s called an inherited ISA allowance.

This means that as well as your normal ISA allowance, you can add a tax-free amount up to either the value of the inherited ISA when they died or the value when it was closed.

If you’ve inherited an ISA from someone who isn’t your spouse or civil partner, the cash ISA will form part of that person’s estate and the usual inheritance tax rules will apply.