Cash ISAs (sometimes called NISAs) are savings accounts that pay interest that is free of Income Tax.

• When might a Cash ISA be for you?
• How they work
• Risk and return
• Access to your money
• Charges
• Are Cash ISAs safe and secure?
• Where to open a Cash ISA
• What are you taxed when opening a Cash ISA?
• What happens if your Cash ISA goes wrong?
• Next steps

When might a Cash ISA be for you?

A Cash ISA is for you if:

• you want to earn tax-free interest on your cash savings
• you are a UK resident for tax purposes
• you are aged 16 or over (junior ISAs are also available).

How they work

The overall limit for ISA contributions in the 2021/22 tax year is unchanged at £20,000.

• With a Cash ISA you’ll earn tax-free interest on your savings.
• You can only open one Cash ISA per year, but it is possible to transfer to another Cash ISA or Stocks and Shares ISA or Stocks and Shares ISA with another provider.
• If you withdraw money from your Cash ISA, you don’t reset your annual limit. For example, say in one year you saved up to the Cash ISA limit and withdrew £1,000. You can’t top up that £1,000 immediately – you’ll need to wait for the next tax year. This is not the case if you have a Flexible ISA (see below).
• A single ISA allowance was introduced in July 2014 for both cash and investments. This means you can divide your ISA allowance between a Cash ISA, an Innovative Finance ISA and a Stocks and Shares ISA in whatever proportion you like.

Cash ISA transfers – the rules

• If you want to change providers – for example, if you find another ISA that is offering a better interest rate – then you must ask your new provider to sort the transfer in order to maintain the tax-free status of your savings.
• Although your current provider is required to let you to transfer your ISA to a new account, your new provider might not accept ISA transfers. Make sure your new supplier will let you transfer your ISA before agreeing to switch.
• Your current provider might charge a penalty for transferring. Check for any fees or charges to make sure transferring is still worthwhile.
• You can transfer your current Cash ISA, as well as your ISAs from previous years. Cash ISAs from previous tax years can be split – with some money going to one provider and the rest to others. However, the full amount you’ve contributed during the current tax year must be transferred to the new provider.
• If you’ve got a Stocks and Shares ISA, you can also transfer money the other way back into a Cash ISA. Previously, you had to sell your investments losing any tax advantages to do so.

Flexible ISAs

ISA providers can offer a flexible facility which will let you withdraw and replace money from your ISA without reducing your current year allowance, provided it’s done within the same tax year.

Not all ISAs will let you do this, and you should check with your ISA provider that your ISA has this facility. This flexibility is currently not available for Junior ISAs or the Help to Buy ISAs.

Don’t forget ISA transfers are still required through your product provider to move money from a previous years ISA subscription to keep its tax-free status intact.

Help to Buy ISA

You can no longer open a new Help to Buy ISA. If you already have one you can save into your Help to Buy ISA until 30 November 2029, with a further 12 months to claim your bonus until 1 December 2030.

ISA Rules on Deceased Spouse ISA transfers

If your spouse or civil partner died on or after 3 December 2014, you’ll receive an additional ISA allowance equal to the value of their ISA savings at the time of their death. This means that on death, the ISA can be transferred to the surviving spouse, still held in the ISA wrapper for the rest of the surviving spouse’s lifetime. This means you will continue to be able to receive any interest or growth tax-free.

Innovative Finance ISA for peer-to-peer loans

The Innovative Finance ISA was introduced in April 2016 and lets you earn tax-free interest on loans arranged through a peer-to-peer (P2P) investment platform.

Your annual ISA allowance can be split between several types of ISA, but cannot exceed the combined annual allowance limit (£20,000 for the 2021/22 tax year).

Risk and return

• Your original savings are protected.
• You won’t need to pay any tax on the interest you earn. But be aware that if you are a 16 or 17-year-old and the money in your ISA was a gift from a parent, they might have a tax bill under the parental tax settlement rules. For information about the parental tax settlement rules, visit the HM Revenue & Customs website.
• Not all Cash ISAs offer great interest rates. Shop around until you find a good deal.
• Beware of teaser rates that are high for a short period of time before dropping off to a low level. If you find that you’re no longer earning a competitive interest rate, look for a higher rate Cash ISA to transfer into.
• Many Cash ISAs are instant access accounts paying a variable interest rate. But Savings Bonds offering a fixed rate over a fixed term can also be Cash ISAs (with your money being paid into an instant access account once the bond matures). Don’t tie your money up unless you can afford to or you might incur early withdrawal penalties.
• Beware of fixed-term cash ISAs offering very high interest rates. In these structured deposits you are taking a gamble on the performance of an index or a commodity price. You might get no income or capital growth, and charges might be deducted from your capital as any return on your investment is dependent on one or a number of rules, for example, the FTSE 100 index will have to increase by 5% over a five year period.

Access to your money

• With instant access Cash ISAs you can withdraw money when you want to.
• With fixed-term Cash ISAs, you’ll get your money back at the end of the period you signed up for (‘the term’). Some accounts allow early withdrawals, but there might be a penalty. Also see Flexible ISAs above.

Charges

• If you withdraw early from a fixed-term account, there might be charges.
• Your provider might charge penalties and fees if you transfer your Cash ISA to another provider.

Are Cash ISAs safe and secure?

Cash you put into UK banks or building societies (that are authorised by the Prudential Regulation Authority) is protected by the Financial Services Compensation Scheme (FSCS).

The FSCS savings protection limit is £85,000 (or £170,000 for joint accounts) per authorised firm.

It is worth noting that some banking brands are part of the same authorised firm.

If you have more than the limit within the same bank, or authorised firm, it’s a good idea to move the excess to make sure your money is protected.

• Find out which banks are part of which authorised firms on the Bank of England website.
• Find out more about compensation if your bank or building society goes bust.

Where to open a Cash ISA

Cash ISAs are available online, through a branch, by post or over the phone, depending on the product and provider.

What are you taxed when opening a Cash ISA?

Your interest is free from tax unless you are aged 16 or 17 years and the money in your account was a gift from your parent.

In that case, they might have to pay tax if parental settlement rules apply – see above. Tax might change in the future.

What happens if your Cash ISA goes wrong?

Banks and building societies are regulated by the Financial Conduct Authority and covered by the Financial Services Compensation Scheme.

Next steps

Ready to start saving?

Comparison websites are a good starting point for anyone trying to find a savings account tailored to their needs.

The following websites compare savings accounts:

• Money Supermarket
• Which?
• Money Saving Expert

Remember:

• Comparison websites won’t all give you the same results, so make sure you use more than one site before making a decision.
• It is also important to do some research into the type of product and features you need before making a purchase or changing supplier.
• Find out more in our guide to comparison sites.

Not for you?

This article is provided by the Money Advice Service.