If you pay tax a cash Isa or individual savings account could be a great place to squirrel away your savings, tax-free. While it isn’t the only tax-free saving option for many, following the introduction of the personal savings allowance, it’s still an option to consider.
What is a cash Isa?
A cash Isa is essentially a savings account where any interest you receive is paid to you tax free.
Not only that, the interest on your Isa remains tax-free for as long as you keep it in the invested in the Isa.
Who can open a cash Isa?
All UK residents aged 16 or above can have a cash Isa, as well as Crown employees, such as a member of the UK armed forces, a civil servant or a diplomat, serving overseas. Anyone married to a Crown employee, yet living abroad is also eligible to open a cash Isa.
For children under 16 years of age, you can invest money in a Junior Isa instead.
Banks, building societies, credit unions, friendly societies and stock brokers provide a range of different cash Isa, all with their own terms and conditions. As with all savings accounts, it’s worth shopping around to get the best interest rates and terms to suit your pocket.
How much can you invest?
Each year the government sets an annual limit that savers can invest in an Isa and for the tax year 2017/18 the limit is £20,000, and can be invested in either a cash Isa, a stocks and shares Isa, a Lifetime Isa (if you're aged under 40), an Innovative Finance Isa or a combination of all, so long as you don’t exceed your annual limit.
It’s important to note that allowances do not roll over from one year to the next. If you don’t use your full Isa allowance in one year, you can’t top it up the next.
Money can be invested either in one lump sum or multiple payments throughout the year – depending what your Isa provider allows – up to the full allowance. Once you have reached the limit you’ll have to find alternative ways to invest your savings.
If you have invested in an Isa and move abroad, you will no longer be eligible to pay into it – unless you work for or are married to a Crown employee. However, you can continue to keep your Isa open and any investments will still earn tax-free interest.
Different types of cash Isas
There are a number of different cash Isas available to invest in. A straightforward cash Isa gives you easy access to your money, and usually comes with a variable rate of interest, meaning that the interest rate could go up or down depending on the economic climate.
If you know that you don’t need access to your money for a certain period of time it might be worth locking your cash into a fixed rate or fixed term Isa. Generally, a fixed rate Isa will pay a slightly higher rate of interest with the proviso that you don’t touch your money for a certain period of time. If you do decide to take your money out before the fixed period has elapsed, you need to be prepared to pay a penalty fee for breaking the terms of your investment.
Alternatively, you may decide to invest in a structured deposit. Interest is index performance related and generally more favourable than other cash Isas, but only if the index the Isa is linked to performs well. If not, you could earn zero interest.
You can take money out of an Isa whenever you want, although you’ll need to check out the details of individual products as there may be penalty charges for cash withdrawals.
If you do decide to take money out, it’s worth noting that you may be able to put it back into your account at a later date if you have a flexible Isa. The total amount invested in a year, whether you take money out or not, cannot exceed £20,000 for the year 2017/18.
It is possible to switch providers as well as transferring funds from one type of Isa to another, for example a cash Isa to a stocks and shares Isa. However, if you decide to move money you have invested during the current financial year you will have to move the whole amount.
For any Isas opened in previous years you can choose to transfer all or some of the savings. Some providers may charge for the privilege so it’s advisable to check before making a transfer.
Cash Isa transfers take up to 15 working days to go through.