So, you’re looking to put some of your money away for the future? Good stuff. Let’s take a look at Cash ISAs.
A Cash ISA might sound more complicated than a normal savings account. Don’t they have something to do with tax?
But, actually they’re pretty easy to get to grips with, they’re available to almost everyone in the UK, and they can let your savings grow more than they would in a normal savings account or stashing it under your bed.
Spoiler alert: there might be an even better savings option for you, we’ll run through these too so you can save your money wisely. Skip ahead.
What is a Cash ISA?
An ISA, which stands for Individual Savings Account, is an account where you can save your money without having to pay tax on any of the money you make from, well your money! Such as earning interest on your savings.
But what about the “cash” in Cash ISA? What does that mean?
This just means that your ISA is for your cash savings, and NOT used to buy stocks and shares in the stock market (like you would with a Stocks & Shares ISA, which we also explain later in this guide).
What’s so special about a Cash ISA?
Let’s talk about interest.
You put your money in the bank to keep it safe, but you’re also letting the bank use your money for their other services — things like loans to other customers. So you’re helping them out, too.
To encourage you to save more, the bank gives you interest, so the amount of money you have grows every year.
But, this is where the taxman gets involved. Currently, you have to pay tax on any interest you make over £1,000 per year if you’re a basic-rate taxpayer in the UK (which means you make less than £50,270 per year), or £500 per year if you make more than £50,270 per year (making you a higher rate taxpayer).
For more information on this, check out your Personal Savings Allowance (PSA).
So, let’s say you’re a basic-rate taxpayer and you make £1,150 in interest within a savings account that’s not an ISA. You’d pay no tax on the first £1,000, but the government would want their cut of the extra £150 – so you’d be paying tax on the £150.
Now, this is where ISAs come in.
Every UK taxpayer has what’s called an annual ISA allowance, which is the amount of money they’re allowed to save, in total, within ISAs, without having to pay tax on the interest their savings make.
Currently, this allowance is £20,000. So, between 6th April and the following 5th April (which is the UK tax year), you can save £20,000 within ISAs and the taxman will let you keep all the extra money your savings make without paying tax.
Your ISA allowance can be used across all of the different types of ISAs you might have; Stocks & Shares ISA, Lifetime ISA and Innovative Finance ISA – but more on these later!
Your money is safe in a Cash ISA
If the bank you’ve put your savings in goes out of business, £85,000 of your money is protected by something called the Financial Services Compensation Scheme (FSCS). And, if you have more than that to invest (lucky you!), you can also spread it across different ISA providers (that’s the people who manage your ISA) if you want to, which means all your savings are protected.
Types of Cash ISAs
When it comes to Cash ISAs, there’s a few different types:
- Fixed-rate: The interest will be fixed at a set amount for a certain number of years, usually between 1 and 5 years. Often the longer the time period the higher the interest rate will be. (currently between 0.5% and 1.75%). You would normally be charged a fee to withdraw your money early.
- Variable-rate: This means that the interest rate you’re getting can go up or down over time. These are normally lower than fixed-rate deals around 0.6%.
- Instant-access or easy-access: This means that you can take money out of your ISA at any time, with no withdrawal fees. Easy-access Cash ISAs typically have an even lower interest rate.
- Flexible: This relates to your ISA allowance – i.e. how much you can put into your ISA. It means that if you take out £2,000 to pay for something, for instance unexpected car repairs, and then put £2,000 back into the ISA in the same tax year, it won’t affect your £20,000 ISA allowance.
Note: if your ISA is not a flexible ISA, you could pay that £2,000 back in, but it would come off your allowance. So that means you could only add another £18,000 to your ISAs that year.
How to open a Cash ISA
Opening a Cash ISA is super easy, you’ll normally register an account either online, over the phone, or in a high street branch. Provide some ID (passport or driving licence), transfer some money in and you’re all set.
You’ll need to be over 16 and a UK resident to open a Cash ISA.
The slightly harder bit is finding the best deal out there, but don’t panic, we’re here to help.
It’s best to look around for the best deal, your bank probably won’t give you the best rate. In fact, a lot of banks are only offering interest rates of only 0.5%. Meaning if you saved £1,000, you’d only make £5 in interest across the whole year. Pretty stingy considering they make billions of pounds in profits every year!
Nuts About Money tip: before you rush off and get yourself a Cash ISA, we recommend learning a bit more about Stocks & Shares ISAs. They’re not as scary as you might think, safe over the long term, and you’ll make a lot more money from your savings.
Now back to Cash ISAs. To find the best interest rates you can have a look at comparison websites, who, quite handily, search the rates for you. Our favourite comparison sites for Cash ISAs are: