What is a Cash ISA?
A Cash ISA is a type of tax-free account, which can be used by savers to hold either cash or investments. They come in many forms, such as easy access, notice accounts or fixed term products - but there is no tax to pay on any interest earned, making them especially attractive for high and additional rate tax payers.
You can put up to £20,000 per year (2022/23) into a cash ISA and spread your allowance across a number of different types, though it is important to remember you can only open one cash ISA per year.
ISAs are the first place that many people should look to put their cash when they are planning their finances, after all when the Government is giving you a tax break, you should grasp it with both hands.
However, as they have increased in complexity, many struggle to understand the different types of ISA available, how much they can put and when.
Types of Cash ISA
You can open more than one of each if you like but you cannot pay into more than one of each type in each tax year. And this can mean that some savers unwittingly find themselves unable to fully utilise their ISA allowance – which is a particular issue with cash ISAs.
Latest savings rates
How to use your annual allowance
As noted you can now deposit up to £20,000 into a cash ISA – the restriction of being able to put just half of your allowance into a cash ISA was lifted in 2015.
However, if you were to put £10,000 into a fixed rate cash ISA, which was subsequently closed to further deposits by the provider, you would be unable to open (or pay into) another cash ISA - even with the same provider - within the same tax year to utilise the rest of the allowance, as this would be viewed as subscribing to another cash ISA unless you transferred your savings from the fixed rate cash ISA to the new account too.
If you have more cash to deposit into an ISA, in general you cannot open another cash ISA – instead you would need to use one of the other options, which may not be appropriate for your own circumstances and plans.
What is a portfolio cash ISA?
Some providers have developed what is known as a portfolio ISA facility, which means that savers can open more than just one cash ISA with the same provider in the same tax year. But, not all providers offer this facility, so it's important to shop around and check what is on the market.
Transferring a Cash ISA
As with any other savings account or investment, it makes sense to regularly review your ISAs to make sure you are still in the best place. But if you do decide to move any of them, you need to be aware of a golden rule.
Unlike a normal savings account, if you find a better option you must not close your account in an attempt to move the money. Instead, you need to undertake an ISA transfer.
You should, therefore, contact the ISA provider that you want to move your money to (beware, not all providers will accept transfers though) and ask them to start the process for you. They will then contact your existing provider and get the ball rolling.
Closing an ISA ends the tax benefits for the money you held in that ISA but transferring it to another ISA without closing the account is the way to ensure you retain the tax benefits on that ISA money.
Navigating the ISA maze can be challenging, with a number of rules and restrictions to be aware of and different options to choose between.
But, while complex at times, this stalwart of the savings market should not be dismissed out of hand, as you may find that you miss out on valuable tax-free income and growth as well as a government bonus in some cases both now and in the future.
For support about how to use ISAs in the best way why not get in touch and arrange a free consultation today. We can help you better understand your options and find solutions that suit your needs.