What is a Cash ISA?
No doubt you will have heard of a Cash ISA, but what really is it? How does an ISA vary from other savings accounts? We have the answers for you below, breaking down the jargon.
ISA stands for Individual Savings Account and there are four different types of ISA. They are:
- Cash ISA
- Stocks and Shares ISA
- Innovative Finance ISA
- Lifetime ISA.
At Suffolk Building Society, we only offer Cash ISAs in our savings range, but you can find out more details on all types of ISAs here.
A Cash ISA is cash in a bank or building society account (and some National Savings and Investments) with an ISA tax-free wrapper around it. Meaning you do not pay tax on any interest you earn on your savings.
The amount you are allowed to invest into an ISA each tax year is set by the government. The tax year runs from 6th April to 5th April, so for the 2022/23 tax year, this has been set at £20,000. At the start of each new tax year, your annual allowance resets – so you could save £20,000 for the year 2022/23, then you’ll get a new allowance on 6 April 2023 and can start saving all over again. Your Cash ISA may earn a fixed or variable rate of interest.
Each year you can use your allowance to open a new ISA, without impacting any ISA savings held in previous tax years. Alternatively, you can add to an existing ISA if the product terms allow for additional deposits.
Why would I want a Cash ISA?
So if that’s what a Cash ISA is, you might be wondering why you should open one. Here’s a quick breakdown of the main benefits of saving into a Cash ISA.
- You won’t be taxed on any of the interest you earn on your savings and can save up to £20,000* a year – neat!
- Some ISAs allow easy access, but check the individual product’s terms and conditions to be sure of the withdrawal terms
- Your money is protected by the Financial Services Compensation Scheme (FSCS)**, up to £85,000 per financial institution
Important things to know about Cash ISAs
We’ve pulled out the main things to be aware of when considering a Cash ISA from the government’s regulations, but you should always check each product’s individual terms too.
- You need to be a UK resident aged 16 years or older to open a Cash ISA. If you are not a UK resident, you can open one if you’re a crown servant or their spouse or civil partner. Parents can open an ISA on behalf of a child aged up to 18
- Each tax year, everyone aged 16 or over gets a new ISA allowance. But if you don’t use it, you lose it
- You cannot hold a Cash ISA with or on behalf of someone else
- You can split your savings across more than one ISA, as long as you stick to your £20,000 personal allowance, for example £5,000 in a Cash ISA, £2000 in stocks and shares ISA etc. You can only pay into one Cash ISA per year.
What can you do with your ISA in the future?
Your ISAs will not close when the tax year finishes. You’ll keep your savings on a tax-free basis for as long as you keep the money in your ISA accounts.
If you wish to do so, you can transfer your funds between ISA accounts, including changing provider all together. This is a straightforward process with the provider and should only take 15 working days for a Cash ISA to be transferred across. Remember to check your product terms and conditions as you may be required to give notice before you can make a withdrawal and you may have to pay a penalty to transfer.
To find out how much of your ISA allowance you have used for the year, you will need to contact your own provider.
What happens with tax if you choose a non-ISA account?
Your Personal Savings Allowance is a tax-free allowance that lets you earn interest on your savings without paying tax on that interest and is separate from any interest earned on ISA accounts. The amount of allowance depends on the type of taxpayer you are:
- basic rate taxpayers (20%) can earn £1,000 in tax-free interest each year
- higher rate taxpayers (40%) can earn £500 in tax-free interest each year
- additional rate taxpayers (45%) don’t get an allowance
If you earn over your Personal Savings Allowance in a tax year, you can inform HMRC if you complete a self-assessment. If not, HMRC will contact you about any tax due. They will normally change your tax code for the following year so that you can pay over the course of the year, rather than in a single lump sum.
Transferring your ISA
If you decide to transfer your ISA to another ISA provider, you will need to contact them to start the transfer process. This ensures that your funds retain their tax-free status. Remember to check your product terms and conditions as you may be required to serve a notice period or pay a penalty to transfer.
If a Cash ISA sounds like the perfect way for you to make some tax-free savings, we have a variety of Cash ISAs available to consider, including a Junior ISA for young savers and a Stepping Stone ISA for people aged 16-20.
Or, if you wish to weigh up all savings options, you can use our handy savings finder to find the product that suits your savings needs best.
*Depending on the annual ISA allowance set by the government