Cash Individual Savings Accounts (ISAs)
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. Despite the new tax allowances for savings interest,
cash ISAs are not to be sniffed at; regularly using a Cash ISA allowance could save taxpayers (especially higher rate) with larger savings pots hundreds, or even thousands, of pounds over time.
And ISA interest does not need ro be declared on tax returns.
How much can I save?
You can save up to £20,000 into a Cash ISA each 'tax year', provided you're age 16 or over and a UK tax resident. The current tax year, 2018/2019, runs between
6 April 2018 to 5 April 2019. You can contribute money as lump sums, a monthly saving, or both.
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.
What types of Cash ISA are there?
Variable RateFixed rate
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 0.5% 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.
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Once money is withdrawn you can pay it back in to your ISA during the same tax year, otherwise you'll lose that part of your ISA allowance which can never be re-claimed. 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 monies yourself as if its from previous year contributions you'll lose that part of your Cash ISA allowance forever!
Use our 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 Shares ISA (and back again in future should you wish). But bear in mind Shares ISAs 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.
From 1 July 2014 ISAs were renamed New ISAs (NISAs - although the 'new' part of the name has since faded) with an inceased annual allowance of £15,000 and no restrictions on the split between cash ISAs and
sares ISAs.
The annual allowance rose to £20,000 from 6 April 2017.
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. |