What is a cash ISA?
Cash ISAs offer a tax-free way to save, with the flexibility to open and pay into multiple accounts. Here, we explain how they work, the advantages and drawbacks, and how to choose the right option for your needs.
Key takeaways
You can deposit up to £20,000 per tax year in an ISA.
You can open and pay into as many cash ISAs as you like within the £20,000 tax-free allowance.
Up to £120,000 of your money is protected within a cash ISA.
You can choose from easy access, fixed-rate or junior ISAs.
What is a cash ISA?
A cash ISA (individual savings account) is similar to a standard savings account, but there's no tax to pay on the interest you earn.
Cash ISAs are an attractive option for savers in the UK, offering a tax-efficient way to store away funds. Your savings in a cash ISA can also be protected by the Financial Services Compensation Scheme (FSCS).
There are lots of different types of cash ISAs, such as fixed-rate and variable-rate ISAs, or even cash Lifetime ISAs to save towards your first home or retirement.
How do cash ISAs work?
Here are some of the key points around how cash ISAs work:
You're able to have more than one cash Isa, as there's no limit on the number of cash ISAs you can open in a tax year, subject to the £20,000 ISA allowance
There are several cash ISA options to choose from, such as easy access, Lifetime ISA, regular saver, and fixed-rate ISAs, as well as junior ISAs for those under 18
The terms of cash ISAs vary, and some may have restrictions on withdrawals, especially fixed-rate cash ISAs
It's possible to transfer funds from previous tax years into new ISA accounts, but you need to do this through the new provider. If you withdraw the money yourself you will lose the tax benefits
You can also transfer money from a stocks and shares ISA to a cash ISA, using a transfer form
You can open a cash ISA online, through an app, or in-branch, depending on the provider
Eligibility requirements for cash ISAs will vary across providers, however you'll usually need to be 18 or over and a UK resident. Junior cash ISAs can be opened by parents or guardians or the child once they turn 16.
From April 2027 only £12,000 of your £20,000 annual ISA contribution allowance can be saved in cash. The rest must be invested in stocks and shares. This does not apply to people aged 66 or over, who can continue to save their full ISA allowance in cash if they wish.
What should I consider when choosing an ISA?
Here are some key things to consider when choosing an ISA:
Have I found the best interest rate?
Aim for the best returns, but be wary of introductory rates that may drop after a certain period.
When can I access the money?
There may be restrictions on when you can withdraw your money from a cash ISA, especially if you’ve chosen a fixed-rate account. Make sure you’re happy with this, if you need access to your money at short notice, an easy-access cash ISA will be a better option.
How will I manage the account?
You can choose from accounts that work via an app, online, by post, by phone or through a bank branch.
Is it better to invest my money?
Beyond cash ISAs, there are stocks and shares ISAs which you can use to invest. These involve more risk but potentially higher rewards as your money is invested in the stock market.
Can I transfer in or out easily?
Flexibility to move your cash to another ISA later can help you take advantage of better rates, but providers have different rules over transfers.
Am I within the ISA deadline?
You must use your allowance before the tax year ends on April 5th, or you'll miss the window.
Do cash ISAs affect your personal savings allowance?
Cash ISAs are exempt from income tax and separate from the Personal Savings Allowance (PSA), which allows basic rate taxpayers to earn £1,000 in interest tax-free annually, and higher rate taxpayers to earn £500.
Additional rate taxpayers do not receive a PSA, making cash ISAs even more beneficial for them.
There is no limit on the number of cash ISAs you can open, as long as you stay within your £20,000 annual allowance.
What's the difference between cash ISAs and stocks and shares ISAs?
When comparing cash ISAs to stocks and shares ISAs, the key differences are the risks and potential returns they offer. Here's what you need to know:
Cash ISAs offer tax-free returns with a guaranteed rate over a set time
Stocks and shares ISAs, while potentially more rewarding, come with the risk of losing money as they are subject to stock market fluctuations
Both types of ISAs share the same annual deposit limit of £20,000, allowing for tax-free growth of your savings.
What interest rates are available with cash ISAs?
Interest rates for cash ISAs vary based on the type and provider. It’s worth shopping around to take advantage of new accounts and bonus offers and you may find you can get a better rate from challenger banks, rather than sticking with what's on offer from the best-known, high-street banks.
As of today, the best rate for a cash ISA is4.68%
Are cash ISAs safe?
Under the Financial Services Compensation Scheme (FSCS) up to £120,000 of money is protected if a bank were to go bust. This is per person, per financial group, so if you have savings in multiple accounts with the same banking group, their combined value counts.
You can find out more about how FSCS protection works with our guide and check whether your money is secure with the FSCS’s protection checker.
What are the pros and cons of cash ISAs?
There are advantages and disadvantages to saving in a cash ISA. The main ones include:
Pros
Any interest earned is completely free from income tax
Savings are typically protected and stable, ideal for cautious savers
Many accounts offer instant or flexible access to your money
Most cash ISAs are covered up to £120,000 per provider by the FSCS
Cons
Interest rates may be lower than the long-term return from stocks and shares ISAs
Savings may lose value in real terms if rates are below inflation
Cash ISAs do not benefit from investment returns or dividends
Fixed-term ISAs may penalise early withdrawals
How do you transfer an ISA from a previous tax years?
Switching your existing ISA for a better interest rate can be beneficial. But it's vital that you remember to:
Check if the new provider allows you to transfer ISAs.
Find out if you'll be charged penalties for an ISA transfer. For example, if you have a minimum term fixed-rate deal.
Remember that ISA transfers from the current year must include the full amount, while previous years can be partial.
Read our guide on switching your ISA funds for more information.
What are the alternatives to cash ISAs?
If cash ISAs don't seem right for you, some of the alternatives to consider include:
Other useful guides
We have a wide range of guides to help you with your savings and ISA decisions.
Compare cash ISAs with MoneySuperMarket
When you’re ready to explore your options, you can compare cash ISAs on MoneySuperMarket. Filter and compare accounts by interest rates, deposit requirements, and access to your money to find the right ISA for your needs.
You can also review both fixed and variable-rate ISAs, or browse all of our top savings accounts to make sure you choose the best option for your circumstances.
Author
Rebecca Goodman
Personal Finance & Insurance Expert
Rebecca is an award-winning financial journalist with over a decade of experience writing for print and online media. Her mission is to take the jargon out of personal finance and to help everyone...
Reviewer
Tim Heming
Personal Finance Expert
Tim Heming is a journalist and editor who has written about personal finance for national newspapers and consumer websites for 15 years. Tim enjoys providing no-nonsense information to help consumers...
