Cash ISAs: An Introduction

Cash ISAs: An Introduction
Date of Publication: Thursday, 27 March 2014 00:00
Last Updated: Thursday, 31 July 2014 13:18

UK residents over the age of 16 can build up their tax-free savings by investing into an ISA. With a new limit of £15,000 per year, you could even move out of tax altogether. Read on to find out more about ISAs.


Should my savings be taxed anyway?

If the amount you earn is less than your tax-free personal allowance, you can register as a non-taxpayer. Complete an R85 form for every bank where you hold savings to ensure that no tax is charged on your interest.


If your level of income is just above your tax-free allowance, your savings interest may be subject to a low tax rate of 10% - though this rate is set to be abolished in 2015.


Unless you are exempt, any interest you receive on standard savings accounts will be taxed, and the returns end up considerably lower than the advertised rate.


This is where an ISA comes in handy.


A £15,000 tax-free cash allowance!? How ISAs work:

Tax Free: ISAs are completely tax-free accounts: the rate you see is the rate you get. They are available to anyone over the age of 16 (though you have to be 18 to open a stock or investment ISA).


Allowance: Everybody receives the same allowance, which is currently £15,000 per year.


Cash / Stocks: You can invest in cash, which is risk-free, or in stocks and shares, which is riskier but which may produce better returns. Any combination of cash and stocks is allowed. From July 2014, you can now invest your entire allowance in cash.


Limits: You can only invest into one of each type of ISA in any given tax year. If you've already invested into a cash ISA since the start of the tax year and you spot a better option, you'll have to apply to transfer your entire current year's contributions across to the new account.


ISA Benefit Example: If the new cash limit (£15,000) was placed in a traditional savings account or fixed-rate bond returning 3%, a basic-rate taxpayer would stand to lose at least £90 per year in tax. So, building up ISA funds over the years could represent a substantial saving in tax-free interest alone.


Unused Allowance: Any unused tax-free allowance is lost at the end of the tax year.


Twenty Note


Can I transfer my ISA?

Yes! You don’t have to stick to the same account. You can transfer ISA funds from one provider to another, or between your cash and stock ISAs, without affecting your current annual allowance.


If you opened ISAs in previous tax years, these are also completely independent from your current allowance and you’re free to move these funds around liberally.


If the rate on old accounts is low or uncompetitive, you can transfer these to a better account at any time, even if you’ve already contributed into a cash ISA in the current tax year.


See our guide to Transferring Cash ISAs for more details.


How do interest rates compare?

Like traditional savings accounts, the rate of interest normally depends upon two things: the level of access that savers need to their cash; and how willing they are to lock away funds for a period of time.


The returns on instant access cash ISAs are usually lower than fixed-rate ISAs. Higher rates are preferred for those who are prepared to lock away their tax-free deposits for between 1 and 5 years.


Fixed-rate ISAs will almost certainly guarantee you better returns. But choose carefully: you are likely to face heavy interest penalties if you attempt to withdraw funds early.



Finding the best cash ISA:

It is wise to watch out for any introductory bonus rates that often make ISA returns look more appealing. After the introductory period expires (typically 12 months), these ISAs can revert to a very low level. The average instant-access cash ISA pays little more than 0.5%.


To benefit from your cash ISA entitlement, it is important that you are aware of how rates compare. If you find a better ISA that allows inbound transfers, you can shift some or all of your past ISA savings to a new provider.


Transferring £20,000 from a cash ISA paying 0.5% to a new provider offering 3% could generate an additional £500 in tax-free interest over the course of a tax year.


Summary: New ISAs (NISAs) arrived in 2014. What has changed?

And what remains the same?

  • Anyone aged 16+ can hold a cash NISA. Savers must be 18+ to hold a stock NISA.
  • You can open only one of each type of ISA in any given tax year.
  • Savers can transfer ISA funds from previous tax years without affecting the current year's allowance.



Make the most of your tax-free savings allowance through Which4U.


Additional Notes:

  • Junior ISAs, launched in November 2011, differ from standard cash ISAs.
  • Tessa-only ISAs (ToISAs), from April 2008, have now reverted to cash ISAs. Toisa funds can be transferred to another ISA for an improved rate. For more details, see Transferring Cash ISAs.
  • Cash ISAs in UK regulated banks are protected by the Financial Services Compensation Scheme (FSCS) up to £85,000 per person per institution. For more details, see Secure Savings and Compensation.


Keith McDonald

Which4U Editor

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Thursday, 27 March 2014 00:00
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