Cash Individual Savings Accounts (ISAs)
| Cash ISAs - Figures to the end of March 2012 |
| Type |
Chart |
Average Rate |
Difference on Year |
| Cash ISA |
 |
0.65% |
 0.11% |
| Source: Bank of England (average quoted household interest rates). |
What are cash ISAs?
Cash ISAs were introduced in April 1999 to encourage us all to save more. They're very similar to a conventional bank or building society savings account, except
that all the interest you receive is tax-free. They are often described as having a tax-free 'wrapper', the wrapper protecting your money from the taxman's claws.
The rates of interest paid on Cash ISAs also tend to be amongst the more competitive that banks and building societies pay on their savings products. They're not
to be sniffed at; regularly using a Cash ISA allowance could save taxpayers (especially higher rate) hundreds, or even thousands, of pounds over time.
How much can I save?
You can save up to £5,340 into a Cash ISA each 'tax year', provided you're age 16 or over and a UK tax resident. The current tax year, 2011/2012, runs between
6 April 2011 to 5 April 2012. You can contribute money as lump sums, a monthly saving, or both. Also, the allowance rises by the rate of inflation each
year measured by the Retail Price Index in September before the end of tax year (switching to the Consumer Price Index (CPI) from April 2012.
Note, you may only use one Cash ISA provider in the current tax year, although you can split money from previous years between providers however you wish.
How good is the tax benefit?
Pretty good! You escape having to pay income tax on the interest, which can really add up over time.
A Cash ISA of £5,340 paying 3.00% p.a. provides an annual tax-free income of £160.20.
This means annual tax savings as follows:
| Basic Rate | Higher Rate | Top Rate |
|---|
| £32.04 | £64.08 | £80.10 |
Use the Candid ISA Tax Saving Calculator to work out out exactly how much tax you could save each year.
Alternatively, the Candid ISA 'How Much?' Calculator includes an estimate of tax savings over a period of your choice.
Aged 65 or over? Good news, Cash ISA interest does not need to be declared to the taxman, hence it doesn't count towards your age-related income tax allowance.
What types of Cash ISA are there?
Variable RateFixed rateIndex-Linked
The most common type of cash ISA and near identical to a high interest savings account. The rate of interest is variable and you can usually withdraw your money whenever
you want without penalty. Some of the highest rates on the market include an introductory bonus, for example, an extra 1% over the first year. Bonuses are ok, provided you
are prepared to move to a more competitive rate once it expires. Most savers don't, which is why the marketing departments at banks and building societies use such schemes.
As the name suggests, these Cash ISAs pay a fixed rate of interest for a fixed period of time, usually between one and five years. Withdrawing your money before the end
of the fixed period often incurs a penalty, so you need to comfortable tying up your cash when you take this route.
Although few examples exist, this is a novel type of Cash ISA and similar in many ways to NS&I Index-Linked Certificates. You receive an interest rate over and above the
rate of inflation, usually measured by the Retail Price Index (RPI). These accounts offer a great way of beating inflation,
provided you're happy tying your money up for a fixed period of time, typically a year or more.
Can I withdraw my money?
Yes, tax-free and whenever you want, subject to the Cash ISA providers terms and conditions. For example, they may require a notice period or you might be penalised for
exiting a fixed period early.
Once money is withdrawn it is no longer part of your ISA and that part of your Cash ISA allowance can never be re-claimed. Always better to withdraw money from another account
that's not tax-free, if possible.
What if my existing Cash ISA is no good?
Good news, it's easy to transfer your Cash ISA to another bank or building society that pays a higher rate of interest. You simply need to complete a transfer form
for the provider you're moving to and they'll handle the rest. DON'T withdraw the money from your existing provider, else you'll lose that part of your Cash ISA allowance forever!
Use the Candid Cash ISA Account Switch Calculator to find out how much extra money you could earn by switching to a better rate.
Transferring to a better rate makes sense, but...
- Check your existing provider will not charge you a penalty for transferring.
- Cash ISA providers have up to 30 days to complete the transfer. They tend to be slow so you could lose interest during the transfer process.
You can also transfer your Cash ISA into a Stocks & Shares ISA, but think very carefully before doing so. It's a one-way move, transfers from Stocks & Shares ISAs into Cash ISAs are
not allowed (probably because the tax benefits on Cash ISAs cost the Government more than those on Stocks & Shares ISAs!). Stocks & Shares ISAs also involve risk, i.e. you could lose money, whereas Cash ISAs are safe.
Tax Exempt Special Savings Accounts (TESSAs) were the forerunner to Cash ISAs. They're now extinct, with any remaining accounts being converted to Cash ISAs on 6 April 2008.
Tax Exempt Special Savings Accounts (TESSAs) were introduced in January 1991 by John Major, the then Chancellor, as a way to encourage the British public to save more.
TESSAs allowed savers to accumulate up to £9,000 of tax-free savings over a five year period. The annual allowances were £3000 in year one, £1,800 in years two, three and
four, and £600 in year five. However, the tax benefits were lost if you withdrew any capital before the end of year five.
Follow-on TESSAs were introduced in January 1996, when the first batch of TESSAs hit their five year maturity. Savers were allowed to roll-over the capital (i.e. the
initial money saved) but not the interest from their maturing TESSA into a follow-on TESSA. Again, the savings period was five years and interest earned was tax-free.
Cash ISAs were introduced to replace TESSAs by Gordon Brown, Chancellor at the time, in April 1999. The annual allowance was £3,000 and unlike TESSAs there was no minimum
holding period to enjoy tax-free interest.
April 1999 also saw the introduction of TESSA Only ISAs (TOISAs). TOISAs were designed to replace follow-on TESSAs for those with maturing TESSAs.
From 6 April 2008 the annual Cash ISA allowance increased to £3,600. TOISAs were also converted to Cash ISAs at that time, making life a bit simpler.
Cash ISA Jargon
Here's some of the more common cash ISA jargon you might come across:
| TESSA | Tax Exempt Special Savings Account, the forerunner to cash ISAs. |
| TOISA | Tessa Only Individual Savings Account, a type of ISA available for money from maturing TESSAs, now extinct. |