Cash ISA Questions & Answers
Below is a list of frequently asked questions relating to savings accounts and Cash ISAs. If you have a question not listed below, please complete our saving enquiries form.
Cash ISAs
What is a Cash ISA?
Where can I get one?
What can be put into a Cash ISA?
How much can you save in a Cash ISA?
How much can I withdraw from a Cash ISA?
How is interest paid?
How do the tax benefits work?
How long will my Cash ISA remain tax-free?
Can I switch from one ISA to another?
What is an ISA tax year?
How many ISAs can I have?
Are there other types of ISAs?
What happens to my ISA when I die?
Savings Accounts
What type of savings accounts are there?
What is the best savings account for me?
How do I open a savings account?
How do I switch savings from one account to another?
Why bother saving?
How are savings taxed?
What financial protection do I have?
What’s the difference between ‘Net’ and ‘Gross’ rates?
How does inflation affect savings?
Cash ISAs are simply savings accounts where the interest isn’t taxed, meaning it’s incredibly rare for a normal savings account to pay more interest. For example, for a cash ISA paying 5% AER to be beaten, a basic-rate taxpayer would need a savings account offering 6.25%, while anyone on the top tax bracket would need a massive 8.3%.
As with normal savings accounts there are variety of cash ISAs available, such as instant access, fixed rate, and accounts with base rate guarantees.
You can get an ISA by going to an ISA Manager, which include banks, Building Societies, National Savings and Investments, some Supermarkets and retailers, Friendly Societies, insurance companies, unit and investment trust companies, financial advisers, fund supermarkets and stockbrokers. The ISA manager will look after your account for you.
ISA managers will give you details of the ISAs they offer and may provide advice about which one would be right for you. Alternatively, you could go to an independent financial adviser for help in choosing the best option, which will be particularly useful if you want independent advice and/or have relatively large sums of money to save.
What can be put into a Cash ISA?
You can only put cash into a Cash ISAa. If you’re looking at buying company shares or funds through an ISA, then you will need to open a stocks & shares ISA.
How much can you save in a Cash ISA?
Because of the tax advantages of an ISA, the government sets limits on how much you can invest in a given tax year. In the current tax year (2020-2021) the maximum you can invest overall is £5,100. The total for a stocks & shares ISA is £10,200 and you can use a combination of both. An example could be:
- £5,100 into a Cash ISA and £5,100 into a stocks and shares ISA
- £3,000 into a Cash ISA and £7,200 into a stocks and shares ISA
- Nothing to a Cash ISA and £10,200 to a stocks and shares ISA
How much can I wishdraw from a Cash ISA?
You can withdraw as much from your Cash ISA as you wish, whenever you want (subject to having an instant access type of ISA, otherwise you will have to wait for the notice period). However, once the money is withdrawn, it can’t be returned. An example could be:
Reminder
Cash ISA annual limit: £5,100
Stocks & Shares ISA annual limit: £10,200
Mr Jones is under 50 and invests £10,200 in a shares ISA at the beginning of the tax year. He may sell the whole investment, or part of it, at any time without losing the tax benefits, but no more may be bought inside that year’s ISA wrapper.
Mrs Smith, again under 50, invests £3,000 in a cash ISA at the start of the tax year. She may save a further £2,100 in the cash ISA, or £7,200 in a shares ISA (or a combination of both) before the end of the tax year.
Mrs Smith then decides she needs to withdraw £2,000 from the Cash ISA.
There’s no problem withdrawing the money; for the time the £2,000 was in the ISA the interest it earned wasn’t taxed. However the fact she has withdrawn the cash doesn’t increase her allowance at all – she can still only put £2,100 more in the mini-cash ISA, or £7,200 in the shares ISA.
Interest tends to be paid direct into an account annually though it can be paid monthly or quarterly. To find out how often interest is paid affects the overall growth of an ISA, please see our AER explained blog.
The benefit of holding any type of ISA for the long term is the affect of compounding. To calculate how much your ISA could be worth in the future, use our compound interest calculator.
You pay no tax on any of the income you receive from your ISA savings and investments. This includes dividends, interest and bonuses (stocks & shares ISAs).
You pay no tax on capital gains arising on your ISA investments (losses on ISA investments cannot be allowed for Capital Gains Tax purposes against capital gains outside your ISA).
For whole-of-life insurance policies that use ISAs, n insurer does not have to pay tax on income and capital gains on investments used to back a ISA life insurance policies. You do not have to pay any tax when the policy pays out.
You can take your money out at any time without losing tax relief and you do not have to declare income and capital gains from ISA savings and investments or even tell your tax office that you have an ISA.
How long will my Cash ISA remain tax free?
The government has now confirmed that Isas will remain indefinitely, which means the money you have saved in ISAs will remain tax free.
Can I switch from one ISA to another?
You can transfer your ISA to another ISA manager whenever you want and you do this by asking the new ISA manager to arrange the transfer. Your existing ISA manager cannot stop you transferring, but they may make you pay a charge, or insist that you sell any existing ISA investments and transfer cash (depending on their terms and conditions). You will probably want to consider this when taking out an ISA.
Your ISA must be transferred directly between the two managers. You cannot transfer your ISA by closing it and opening a new ISA with the new ISA manager, otherwise you will lose part or all of your allowance.
Subscriptions to a stocks and shares ISA can only be transferred to another stocks and shares ISA. However, subscriptions to a cash ISA can be transferred to another cash ISA, or to a stocks and shares ISA (see above).
A particular ISA may only allow certain types of savings or investments. For example, managers offer ISAs that can include only that company’s products. And not all managers allow life insurance products to be held in their ISAs. If you are not sure what type of savings or investments you hold you should ask your ISA manager. If you want to include savings and investments that are not available for your ISA, you may have to transfer to another manager.
If you want to transfer the money you have put into your ISA in the current tax year, you must transfer all of it.
You can transfer all of the money you put into your ISA in earlier years or only some of it, if you wish. However, some managers may not allow you to transfer part of your ISA (depending on their terms and conditions).
The ISA tax year starts on 6th April and ends on 5th April the following year. Each 6th April you get a new ISA limit, regardless of the present balance in your account. So if you already had £20,000 saved in your Cash ISA, from 6th April you could pay in another £5,100 – bringing your total Cash ISA savings up to £25,100. Also, any interest earned on the balance can remain in your ISA.
The annual limit is on the money you pay in during the tax year. So if your balance from previous tax years was already £20,000, you could withdraw £3,000 of this in May, but in June still pay in your full £5,100. This would bring your Cash ISA balance up to £22,100.
There are limits on the number of ISA accounts you can subscribe to each tax year. You can only put money into one cash ISA and one stocks and shares ISA – one each for cash and stocks and shares. However, in different years, you could choose to save with different managers. There are no limits on the number of different ISAs you can hold over time.
Are there other types of ISAs?
There are two type of ISAs: Cash ISAs and Stocks & Shares ISAs. A Cash ISA allows you to save up to £5,100 per year cash in a deposit type account. A Stocks & Shares ISA allows you to invest up to £10,200 in a variety of products such as shares, corporate bonds, gilts, OEICs, some life insurance polices etc.
What happens to my ISA when I die?
Your ISA will end on the date of your death. There will be no tax to pay on income or capital gains up to that date, but your personal representatives will have to account for tax on any income or gains arising after your death. The ISA manager will either sell the investments and pay the proceeds to your personal representatives (or a beneficiary of your estate), or transfer the investments directly into their hands. The terms and conditions of the ISA may specify which it will be.
An ISA life insurance policy will pay out on your death. Your personal representatives will have to claim the death benefit. There will be no tax to pay on income or capital gains that arise before the insurer accepts the claim. However, your personal representatives will be taxed on any interest that is paid if there is then a delay in paying out the claim. The insurer will deduct tax at the lower rate before paying over the interest.
N.B. ISA investments form part of your estate for Inheritance Tax purposes.
What type of savings accounts are there?
Fundamentally, all savings accounts are the same: they are deposit based accounts where a bank or other institution pays you a rate of interest on your money (which you effectively lend to them, so they can lend it out at a higher rate of interest or invest).
You will need to decide whether you want an online-only savings account or one with a high street bank or building society. You then need to consider some of the following:
– Do you want instant access, a notice account, or a fixed term (bond) account?
– Would you prefer a fixed or variable interest rate?
– Do you want to deposit regular amounts or a single lump sum?
– Do you want tax free (Cash ISA) savings?
– You want the interest paid monthly or annually/
In a nutshell, the mian types of savings accounts are:
– Instant Access Accounts
– Notice Accounts
– Fixed term (bond) accounts
– Cash ISAs
– National savings accounts
What is the best savings account for me?
That depends on what you want. You will need to consider the questions above before you decide which type of account to open.
How do I open a savings account?
That depends on whether you want an online-only, telephone-only or Internet-only account. Interests rates are not the only things to consider – what about accessibility, customer service and the terms and conditions of the account (e.g. how easy is it to transfer or switch)?
A good way of researching acounts is to use one or more comparison sites or simply search ‘savings accounts’ on Google. You can then look at the different providers and then contact them for more information. If you would like some guidance or advice on doing this, you can contact us here.
You will then need to complete and physical or online application and agree to the terms and conditions.
How do I switch savings from one account to another?
Here are five main reasons people want to switch savings accounts (in order of importance):
1. To get a better rate of return
2. To get a more consitent rate of return
3. To get a better online banking service
4. To get better overall service
5. To get easy access to branches
The first thing you need to do is check if you are still within the fixed term of the account your money is currently held in and also, if there are any switching penalties. You will also need to check the terms of the new account to find out if it will accept transfers and if there’s any limits on how much you can deposit for example.
Once you’ve done that’ it’s as simple as transferring the money from the old account to the new account and if you bank online, this should be even simpler.
If you leave money in a somple current account, you will usually receive very rates of interest – usually lower than 1%. This means that inflation is actually devaluing your money as it is at a higher rate than the rate of return you’re geting on your money. That reason alone should be enough to motivate you to find a good savings account.
Another reason is to create a savings habit. You can earn a high income, but if you don’t create a saving discipline, you will never be financially secure as ou will spend it and it will fritter away. Think of some sports stars and other celebritris who have eanred millions and ended up broke.
If you haven’t created good savings habit, DO IT NOW!
Unless your money is in a Cash ISA, then you will need to pay income tax on the interest earned in your savings account(s). The rate you pay will depend on what income tax bracket you are in.
Savings accounts are taxed at source, meaning the bank pays you interest after deducting tax.
What’s the difference between ‘Net’ and ‘Gross’ rates?
Advertised interest rates on savings accounts tend to be Gross figures e.g. 4%. However you will not actually get paid 4%, because this is the interest rate before tax has been automatically paid. For example:
- Say you have £1,000 deposited in an account earning 4% a year
- That equates to £40 in Gross interest
- But all banks and building societies must automatically deduct 20% tax, so the sum you actually receive will be £32 with the balance of £8 being sent to the taxman
If you’re a higher rate tex payer, you must let your Tax Office know what interest you have received so that they can collect the extra tax due.
What financial protection do I have?
Savings accounts are deposit-based. This means you’ll usually get back the money you have put in plus interest, unless the bank or building society collapses. In the unlikely event that this happens, and as long as the firm is regulated by the FSA, the Financial Services Compensation Scheme (FSCS) should pay compensation to customers, up to a set limit.
Many deposit-taking firms operate using different trading names which are not separately authorised by the FSA. You may find that you have deposits with different banks but they are actually linked and operate under one single authorisation. This would mean that you are only covered up to a total of £50,000. For more information, please visit the FSCS website.
How does inflation affect savings?
Inflation is the gradual increase in money supply relative to the output of an economy. Over time, it devalues currency, which means that unless you money is growing at a rate at least equal to the rate of inflation, your money is becoming increasing less valuable. See our inflation blog for a better understanding of how inflation works.