The basics of cash ISAs – making the most of tax-free savings

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Cash ISAs pay interest tax free and when you cash them in, there’s no extra tax to pay. Find out about the basics of cash ISAs and why they’re a great way to save.

The basics of cash ISAs

Cash ISAs are an easy way of getting into the savings habit. They are flexible accounts and many banks and building societies offer them. Most cash ISAs don’t have any kind of lock-in or notice period, which means you can take your cash out easily. Cash ISAs pay interest tax free – no matter how much money you have saved.

SAVVY TIP: Since April 6th 2016, banks and building societies pay interest on ordinary savings accounts tax free. However, there are limits on how much interest you can receive before you have to pay tax . You can get up to £1,000 a year in interest from ordinary savings accounts without paying tax or £500 if you’re a higher rate taxpayer. If you earn more interest than this, you have to pay tax.

What is a cash ISA?

A cash ISA is simply a tax-free savings account. ISA stands for individual savings account. here are limits on how much you can pay in every tax year.

  • You can open one cash ISA each year. You can only take out one cash ISA every tax year. You can also take out one stocks and shares ISA in the same tax year.
  • You can open a cash ISA with a different bank or building society. You aren’t stuck with the same bank or building society each year. If you want to, you can open a cash ISA with a different bank or building society each year.
  • You can transfer money from your cash ISA into another cash ISA to get a better return, or you can transfer it into a stocks and shares ISA. You can also transfer money from a stocks and shares ISA to a cash ISA.

SAVVY TIP: You can only transfer all your ISA money from the current tax year, although you can move either some of it or all of it from previous tax years. Transferring your ISA doesn’t affect your current year’s ISA allowance.

How much can you pay into a cash ISA?

You can save up to £20,000 into a cash ISA in the tax year 2019 -20. You have to use your cash ISA allowance between April 6th one year and April 5th the following year (which is when the tax year starts and finishes). You cannot carry over any unused ISA allowance, so if you don’t use it one year, you’ve lost it for good.

SAVVY TIP: If you take out a cash ISA it will affect how much you can invest in a stocks and shares ISA. The ISA allowance of £20,000 (in tax year 2019 – 20) applies to both cash and stocks and shares. You can put the entire £20,000 into a cash ISA, the entire £20,000 into a stocks and shares ISA or you can split the allowance between the two. It means that for every £1 you have in a cash ISA, you have £1 less in your ISA allowance to invest in a stocks and shares ISA.

Who can have a cash ISA?

If you’d like to open a cash ISA, you must:

  • Be aged 16 or over. You cannot open a cash ISA if you’re younger than 16.
  • Be a UK resident. You cannot open a cash ISA if you are not resident in the UK. However, there are some exceptions, such as if you or your husband/wife/civil partner or partner are in the armed forces or diplomatic services.
  • Open an ISA in your name only. You cannot have a joint ISA account with anyone else.

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How to transfer a cash ISA

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