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Complete guide to cash ISAs

All basic rate taxpayers can earn up to £1,000 of tax-free savings interest per year, under the Personal Savings Allowance (PSA) limit. 

An increase in savings interest rates could tip a regular saver over the PSA limit, requiring them to pay tax – but not with a cash Individual Savings Account or ISA. A cash ISA ensures that any interest you earn on your savings will always be tax-free.

Choosing the cash ISA that is right for you depends on your aspirations and the outcomes that you would like to see. There are a range of different cash ISAs to choose from, including cash ISAs for children, ISAs for those looking to save for a first home, and ISAs for those looking to save for retirement.

We’re here to help you make your decision.

What is a cash ISA?

Just like a savings account, a cash ISA (Individual Savings Account) is a safe, secure way to store your money. The only difference is that any interest you earn on your savings is tax-free.

What are the benefits of an ISA?

There are many reasons to opt for a cash ISA over alternative savings accounts. Not the least of these is that they’re a great way of saving for your future. Other benefits include:

  • Currently, all basic rate taxpayers can earn £1,000 of tax-free savings interest per year, under the Personal Savings Allowance (PSA). However, there is no guarantee that this won’t change in the future. With ISAs, you’re guaranteed your savings will always be tax-free. Investing your allowance each year means you can grow your savings without having to pay any tax.
  • If you were to opt for an alternative regular savers account and savings interest rates increased, the money you’d saved may tip you over the Personal Savings Allowance limit.
  • Some types of cash ISA come with the added benefit of government boosting. For example, the 25% government bonuses offered with Lifetime ISAs. 
Are ISAs tax-free?

Yes, with a cash ISA you can rest assured your savings are not only tax-free, but safe from changing regulations. 

The only time when a cash ISA isn’t exempt from tax is if you are aged 16 or 17 years old, and the money in your account is a gift from a parent. If this is the case, your parents may have to pay tax if parental settlement rules apply.

Who is eligible for a cash ISA?

To be eligible for a cash ISA, you must be aged 16 or over and a UK resident. The only exception to this is in the case of Lifetime ISAs, which require you to be 18 years old.

How many ISAs can I have?

You can only open one cash ISA per year. You have a single ISA allowance each year, which you can divide between a cash ISA, a stocks and shares ISA, an innovative finance ISA and/or a Lifetime ISA. 

With a Lifetime ISA, the maximum allowance is £4,000 each year, meaning if you have a Lifetime ISA you then have up to £16,000 to split between the other types.

How much can I put in an ISA?

The total amount you can put into a cash ISA for the 2022/2023 tax year is £20,000. This is known as the ISA allowance and is available to every person over 16 in the UK. 

You have the choice of using up the maximum allowance in one account or splitting between the different types of ISA products.

Any interest your ISA earns doesn’t count towards your Personal Savings Allowance.

When is the ISA deadline?

The ISA deadline is midnight on 5th April each year. 

This is the end of the tax year. Any unused allowance doesn’t roll over into the new tax year, so you should try to make the most of your allowance before the deadline comes around.

What are the different types of cash ISA?

There are a number of different cash ISAs available to help you achieve your savings goals. Whether you’re saving for your first home or setting up a nest egg for your golden years, there’s an option to suit you.

Fixed rate ISAs pay a guaranteed amount of interest for a set period of time, from six months to five years. Though withdrawals are permitted, they’re subject to penalties. A fixed rate ISA is better suited to those who won’t need immediate access to their savings.

Junior ISAs are tax-efficient ways of saving for the future of the next generation. You must be 16 or over, a UK resident to open one on behalf of a child, or be a child aged 16 to 18 to open one for yourself. 

Lifetime ISAs are a tax-free savings account that also offer a government bonus of 25% on top of the money you put in, up to a maximum of £1,000 a year.

The Lifetime ISA is a long-term savings product designed to incentivise saving towards your first home and/or retirement. If you withdraw for any other reason (excluding terminal illness with less than 12 months to live or death) you will incur a charge of 25% on the total funds – recovering the Government bonus, plus an extra charge penalising you for the withdrawal.

With a Lifetime ISA, you can deposit as much as £4,000 per year until the age of 50. Lifetime ISAs can only be opened by those aged 18 to 39, and funded by those aged 18 to 50. 

You should consider if saving in a cash LISA is the right option for saving towards your retirement. If you are employed, you should consider the potential availability of a workplace pension scheme through an employer, which provides employer matched contributions, and your tax position. If you save in a LISA instead of enrolling in, or contributing to, a pension scheme from your employer or personal pension scheme:

  • You may lose the benefit of contributions by an employer (if any) to that scheme; and
  • Your current or future entitlement to means tested benefits may be affected (these depend on the amount of income and capital you have, which includes savings).
How many ISAs can I have?

You can have multiple ISAs at one time, but you can only open or pay into one of each type of ISA using your £20,000 allowance. 

Though you can only open one cash ISA each tax year, there’s no limit to the number of ISA transfers you can make, should you spot a better interest rate with another provider.

What happens if I take money out of my ISA?

Withdrawals are permitted from most ISAs. However, if you make a withdrawal from a fixed rate ISA, you will be subject to a penalty in the form of a loss of interest on your savings. 

If you think you will need access to your savings quickly, then you may be best suited to an ISA that doesn’t penalise withdrawals.

In relation to the Lifetime ISA a penalty of 25% of the withdrawal amount will be deducted unless the funds are being used for either:

  • Buying your first house (the account must have been held for a minimum 12 months).
  • You reach the age of 60.
  • You are diagnosed with a terminal illness and have less than 12 months to live.

The Lifetime ISA is a long-term savings product designed to incentivise saving towards your first home and/or retirement. If you withdraw for any other reason (excluding terminal illness with less than 12 months to live or death) you will incur a charge of 25% on the total funds – recovering the Government bonus, plus an extra charge penalising you for the withdrawal.

Can I transfer my ISA to another provider?

There are a number of reasons you may want to transfer to a new provider. For example, if you’ve spotted better rates elsewhere. You are permitted to unlimited transfers each tax year. 

Always check that your new provider accepts transfers, as not all banks and building societies are obliged to do so.

Avoid withdrawing money from your ISA yourself, as your savings may lose their tax-free status.

Can I inherit an ISA?

If your spouse or civil partner passes away, you will be eligible to receive an Inheritance ISA Allowance. Find out more in our guide to inheritance ISA allowance.

Why not visit your nearest branch so one of our colleagues can talk you through your options? We’d love to see you. Alternatively, why not browse our ISA product range.

Need some help?

Pop in to your local branch or give us a call, we're always happy to chat.

0345 734 4345

Our lines are open Monday to Friday from 8am - 6pm. We're closed on Saturdays, Sundays and bank holidays.

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