In a world full of different ISA types, rules, and providers, knowing which one’s best for you and your financial goals can quickly becoming confusing.
That’s why, if you’ve done some initial research on Cash ISAs and want to explore them further, we’ve put this comprehensive Cash ISA guide together to help.
From the basics of how they work to some of the more complex things to consider, read on and become a Cash ISA expert in no time!
What is a Cash ISA?
So, what is a Cash ISA, exactly?
Well, in simple terms, it’s a type of savings account (the ISA part actually stands for Individual Savings Account) available to UK tax residents aged 18 or over.
Generally suited for short to medium-term saving, a Cash ISA account is a ‘safe’ option for your money because they offer specific interest rates — and guaranteed returns. This is the opposite of a Stocks and Shares ISA, where your money’s invested in stock markets — and the value of it can go down, as well as up.
As with traditional savings accounts, you can pay into a Cash ISA as often as you want.
Cash ISAs differ, however, with the amount you can pay in. As things stand, you can save up to £20,000 each tax year using one (this £20,000 limit is known as your annual ISA allowance).
Where a Cash ISA really comes into its own – including Wealthify’s – is that you don’t have to pay any tax on the interest you earn!
And, even though they’re both cash savings accounts, this isn’t the case with our Instant Access Savings Account, where the interest generated on your money is classed accordingly as taxable income.
The benefits of a Cash ISA
We’ll go into more detail about benefits later on in this Cash ISA guide, but here’s a quick look at the main ones to get you started.
- Tax-free: As well as being able to deposit up to £20,000, you don’t have to pay any tax on the interest you earn with a Cash ISA.
- Variety: Whether you’re after a fixed or variable interest rate, easy access or notice account; there’s a variety of Cash ISA types to suit your financial needs.
- Stability: If you’re looking for a risk-free option for your money with guaranteed returns, a Cash ISA offers exactly that.
- Access: Thanks to what are called ‘easy access’ Cash ISAs, you can access your money anytime, with no fees.
- Flexibility: You’re free to open as many Cash ISAs as you want, with specific ‘flexible’ Cash ISAs letting you withdraw and deposit money without affecting your allowance (which is capped at £20,000).
How does a Cash ISA work?
As we’ve already touched on, a Cash ISA can be opened by any UK tax resident aged 18 and above. When it comes to understanding how they work in more detail, however, there are a few other key rules and points to be aware of.
Tax benefits
As with all types of ISAs, a Cash ISA protects your savings from tax, with this protection often referred to as a ‘tax wrapper’. This means you can save up to £20,000 each tax year, without having to pay Income Tax on interest or dividends — or any Capital Gains Tax on profits.
Types of Cash ISA
There are two different types of Cash ISA: fixed rate and variable rate.
Fixed rate Cash ISA
Fixed Rate Cash ISAs give you a fixed interest rate for a certain amount of time (usually one to five years). As a rule of thumb, Fixed Rate Cash ISAs are a better option than Variable Rate ones if you’re looking for higher interest rates but don’t need access to your money over a set length of time.
That’s because, even though you’ll get a guaranteed interest rate for the length of that term, your money will also be locked away and tied up during that same period. If you do need to access it in the meantime, then you might have to pay an early access or exit fee.
Depending on the provider, something else to consider is that you can’t always add more money to a Fixed Rate Cash ISA once you’ve made your original deposit.
Variable rate Cash ISA
As the name suggests, the interest rate on a Variable Rate Cash ISA varies, meaning it can go both up and down. This movement is normally in line with the Bank of England base rate, and your provider will make you aware of any upcoming interest rate changes.
With that in mind, a Variable Rate Cash ISA could provide both better and worse interest rates than a Fixed Rate Cash ISA.
When it comes to Variable Rate Cash ISAs, you’ll also hear the terms ‘easy access’ and ‘flexible’ — with Wealthify’s Cash ISA being both!
Easy access Cash ISA
An easy access Cash ISA means you can access your savings at any time. However, this benefit only applies to Variable Rate Cash ISAs, not Fixed Rate ones; as a result, Variable Cash ISAs could be considered a more versatile option, especially if you think you’ll need access to your money.
Flexible Cash ISA
As well as being easy access, Wealthify’s Cash ISA is also what’s known as ‘flexible’. Flexible Cash ISAs like ours let you take money out and pay it back in without your annual ISA allowance being affected.
With a non-flexible Cash ISA, however, withdrawals aren’t added back to your allowance, meaning you’re effectively losing that part of it. As a result, Flexible Cash ISAs are a good option if you don’t want to be penalised for accessing your savings.
Cash ISA vs Stocks and Shares ISA
Despite having the same tax benefits, if you wanted to use one word to sum up the difference between these two types of ISAs, it would be ‘certainty’.
As an example, let’s compare the Wealthify Cash ISA with our Stocks and Shares ISA.
Even though the interest rate is subject to change because it’s variable, our Cash ISA currently offers a guaranteed return of 4.39% AER / 4.30% gross p.a. (variable) paid monthly. That means you can pay into it with the certainty of knowing how much interest your money’s going to make every month.
When you open a Wealthify Stocks and Shares ISA, on the other hand, we invest your money in the stock markets based on your chosen Investment Style.
And, due to the up-and-down nature of markets, the value of your investment can go down as well as up, meaning you can’t be certain of getting back the amount you put in.
That’s why Stocks and Shares ISAs are more of a long-term option for your finances.
By leaving your money invested for five years or longer, you’re giving it more of a chance to ride out the highs and lows of market movements — which could lead to better long-term returns than a Cash ISA.
If you can’t decide between the two, you can have both open at the same time, splitting your annual ISA allowance of £20,000 between them however you like.
Cash ISA vs Lifetime ISA
Although they’re both part of the ISA family, Lifetime ISAs are different to Cash ISAs in many ways, starting with what they can be used for.
Whereas a Cash ISA can be used for a variety of financial goals, a Lifetime ISA needs to be specifically used to save for your first home in the UK (up to the value of £450,000) or retirement.
Likewise, a Cash ISA lets you save £20,000 in cash each tax year. With a Lifetime ISA, you can only contribute £4,000 a year until you’re 50, but you can hold cash, investments — or a combination of both.
A Lifetime ISA also provides an extremely useful 25% bonus on anything you put in. That’s an extra £100 for every £400 you put in, meaning you could pocket up to a maximum of £1,000 per year — for free! You’ll receive this bonus every month, and you’ll then get interest or potential investment growth on it, too.
It’s important to understand that if you withdraw your money from a Lifetime ISA for any other reason than buying your first home or retirement, then the government will charge you a 25% penalty.
Once you’ve maxed out your £4,000 Lifetime ISA allowance for the current tax year, there’s nothing stopping you from using a Cash ISA to save the remaining £16,000 of your overall £20,000 allowance.
What is the Cash ISA allowance for 2024/25?
The Cash ISA allowance for 2024/25 is £20,000.
Just to recap, however, that this £20,000 annual ISA allowance actually refers to the total amount you can save or invest in across all types of ISAs during a given tax year.
This means you can either put all your allowance in one ISA (apart from a Lifetime ISA), or you can split it between a number of different ISA accounts.
For example, you could put all £20,000 in a Cash ISA account; or if you were splitting your annual allowance across different ISAs, you might save £4,000 in a Cash ISA, £10,000 in an Investment ISA, £2,000 in an Innovative Finance ISA, and £4,000 in a Lifetime ISA.
How many Cash ISAs can I have?
Following a rule change at the start of the 2024/25 tax year, you can now have as many different Cash ISAs – with as many different providers – as you want!
Beforehand, you were only ever allowed to open and pay into one Cash ISA account per tax year (with some providers now even letting you open multiple Cash ISAs with them within the same tax year).
Regardless of how many Cash ISAs you have open, however, the same principle still applies to your annual ISA allowance: you can’t use them to exceed your £20,000 limit.
And, even though you’re still only allowed to open just the one Lifetime ISA, this new rule means you could split your allowance across the board as follows…
- £7,000 with Wealthify: £5,000 in our Cash ISA + £2,000 in our Stocks and Shares ISA.
- £4,000 with Provider B: £4,000 in a Lifetime ISA.
- £3,000 with Provider C: £2,000 in a Cash ISA + £1,000 in an Innovative ISA.
- £2,000 with Provider D: £2,000 in a Cash ISA.
…and still have £4,000 of it left to use!
How to transfer a Cash ISA
If you want to transfer your Cash ISA to a different provider, the process is pretty straightforward and takes around 15 days.
Some of the most common reasons for transferring a Cash ISA include:
- Getting a better interest rate.
- Combining multiple Cash ISAs with one provider to make managing them easier.
- Changing to a different type of ISA.
Once you’ve done your research and found a new Cash ISA account you’re happy with, it’s a simple three-step process:
Check for hidden or additional fees: Your old provider may charge you for transferring your Cash ISA; if you’re unsure, then it’s worth contacting them directly.
Contact your new provider: Once you’ve told the new provider you want to transfer to them, they’ll give you an online or paper ISA transfer form.
Complete the ISA transfer form: If you withdraw the money without using the form, it will count against your tax-free allowance when you reinvest it in the new ISA. Once the form is filled out correctly, your new provider will organise everything and move your money to the new Cash ISA — retaining its tax benefits in the process.
What to look out for with Cash ISAs
If you’ve made it this far and feel ready to open a Cash ISA account, there are just a few final important questions to ask yourself before getting started:
- Am I going to need access to my money in the near future?
- If not, might I be better going with a fixed rate Cash ISA?
- Does my chosen provider accept ISA transfers from other accounts?
- If so, are there any charges for transferring to them?
- Do they charge an exit fee or penalty if I want to transfer out?
How to open a Cash ISA account
So, you want to open a Wealthify Cash ISA? Great!
Before doing so, however, you need to:
- Be a UK tax resident aged 18 or over.
- Have a valid UK residential address (this doesn’t include a PO Box address).
- Have a valid National Insurance Number.
- Hold a UK bank or building society personal account in your name. You can also use a joint account, as long as the other person also meets the eligibility criteria.
You can’t share an ISA or set one up on behalf of another adult, unless you hold Lasting Power of Attorney.
If you tick all those boxes, you can open a Wealthify Cash ISA using our website or app, providing some basic details to get started, such as your:
- Name
- Address.
- Date of birth.
- Proof of identity and address.
Once you’ve passed our standard security checks, you’re then free to start saving up to £20,000 each tax year in your brand-new Cash ISA!
