What is a cash ISA?

Cash Individual Savings Accounts are very simple. They’re available to UK residents aged at least 16-years-old and work in the same way as a normal savings account.

You put money in, and the account provider pays you interest. The key difference, however, is that you’ll never have to worry about paying tax on any income your ISA savings earn.

So, how do you start saving in one? What do you need to know about these accounts and are there any golden rules to follow?

Here’s our guide to the world of cash ISAs.

What are cash ISAs?

Cash individual savings accounts enable you to save up to a set amount in each tax year, which runs from 6th April to the following 5th April. The current maximum is £20,000*.

Accounts can be set up via banks, building societies and other financial institutions. This means there’s plenty available. In fact, making a choice could be your biggest problem.

Aren’t cash ISAs all the same?

No. Despite their straightforward objective, cash ISAs are not all the same. That’s why it’s important to pay close attention to what’s being offered.

The principal way in which they differ is the interest rate offered. For cash ISAs this is one of the most important factors, so shop around for the best deals.

The other factor is access to your money. Some accounts offer instant access, while others insist you wait for longer periods. Generally, the latter offer higher rates of interest.

How to choose your cash ISA

This will depend on your savings objectives and financial needs. That’s why it’s important to be clear on these goals before you start shopping around.

Is there a good chance you’ll need to withdraw the money over the coming months? Are you saving for a specific requirement? Have you other savings set aside?

If you’re unsure of your financial requirements, then consider opting for an easy-access ISA as this will provide a degree of flexibility.

What do you need to consider?

Always check the terms and conditions with cash ISAs – especially when notice periods apply before you can get your hands on the money.

For example, withdrawing before the pre-agreed term on some accounts will trigger an interest penalty.

Do you even need a cash ISA?

In recent years, the debate has been whether you need a cash ISA at all. This has been since the UK government’s introduction of the Personal Savings Allowance.

This enables basic rate taxpayers to earn up to £1,000-a-year interest (£500 for those in the 40% bracket) tax-free. For most people, this will be plenty.

However, those in favour of cash ISAs argue these products can better help protect people from tax changes in the future. They will also be beneficial when larger sums have been saved.

What are the benefits of cash ISAs?

They enable you to save tax-free. Unlike stocks and shares ISAs, there’s no risk that the overall value of your savings pot will go down, although inflation can erode the overall purchasing power of your savings over time.

Cash ISAs are also simple, easy to understand, and you benefit from protection via the Financial Services Compensation Scheme if you’re saving with a UK-authorised bank.
This means if you have saved up to £85,000, your money is protected if the bank or building society fails.

Other benefits include the ability to transfer your cash ISA holdings if you find better paying accounts – or even switch them into other types of ISA.

What are the downsides of cash ISAs?

The amount of interest received can vary. Also, during periods of high inflation, the amount your money can earn is unlikely to keep up.

This, effectively, means the value of your cash will be eroded over time. Therefore, it may not make them suitable for longer-term savings and investments.

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If you opt for a notice account – in exchange for a higher rate of interest – you will have to wait a while before being able to access your money.

The interest rate earned by your account is likely to change. Therefore, ensure you keep abreast of how much you’re receiving and consider switching if the rate falls.

Investors willing to take more risk may prefer to invest in a stocks and shares ISA.

Can I transfer my savings?

Yes. You can transfer your Individual Savings Account (ISA) from one provider to another. It’s also possible to transfer your savings to a different type of ISA.

However, a few rules do apply. For example, if you want to transfer money you’ve invested in an ISA during the current year, you must transfer all of it.

For money you invested in previous years, you can choose to transfer all or part of your savings.

Popularity of cash ISAs

The simplicity of cash ISAs makes them very popular – as is shown from an analysis of these accounts by the Office for National Statistics.

Its data shows around 13 million Adult ISA accounts of all types were subscribed to in 2019 to 2020, up from 11.2 million the previous year.

The number subscribing to cash ISAs subscriptions, meanwhile, increased by 1.2 million from the year 2018 to 2019.

Additionally, the figures revealed around £75bn was subscribed to Adult ISAs in 2019 to 2020, up £7.1bn on the previous year. It was driven by the £4.8 billion rise in cash ISA subscriptions.

*For the tax year 2022-2023