Unless you are tax exempt, you pay tax on any interest on savings you earn; you may not even realise it because 20% of your interest is deducted before you receive it; higher and top-rate taxpayers have to declare their earnings to the taxman and then pay the extra tax.
Cash ISAs are savings accounts that allow you to save without paying tax on any interest that you earn.
Each year you have an ISA allowance, which is an amount you can save into a tax-free account and this resets at the beginning of each tax year – it cannot roll over, if you don’t use it in a particular tax year it is gone forever.
- The allowance for the 2017-8 tax year is £20,000, all of which can be in cash, or can be split between cash and stocks and shares.
- Save without paying tax on interest
- You can open one new Cash ISA every tax year – 6th April to 5th April.
- Withdrawals as with any other saving account, subject to the provider’s terms and conditions
- Transfer between products to achieve better rates
A range of options exist including regular savers ISAs, fixed rate bond ISAs, easy access ISAs and the recently launched Help to Buy ISA – each is like a normal savings account except the taxman won’t be looking for a slice of your interest.
That means you can save in the best way for you. If you haven’t put any money aside this tax year then it may make sense to start by using your tax-free allowance.
‘if you don’t use it in a particular tax year it is gone forever’
Cash ISAs are available to UK residents aged sixteen and over; those wishing to save for a child under sixteen can benefit from a Junior ISA (JISA).
ISAs are effective for long term savers as your cash is sheltered from tax all the time it remains within a wrapper and compound growth will see the value of your pot grow over time.
Cash ISAs may be a place to harbour your rainy day fund because most offer easy or instant access.
Currently, if you withdraw funds from a Cash ISA it stops being tax free and if you want to reinvest it, that counts against your annual allowance; however, the introduction of ‘radically flexible ISAs’ on 6th April 2016 allowed savers to withdraw and replace money from their Cash ISA without counting towards their annual limit for that year as long as the repayment is made in the same tax year as the withdrawal.
ISA providers have to permit transfers and the Financial Conduct Authority (FCA) is ensured a guaranteed seven-day Cash ISA switch period.
‘it is worth shopping around at the end of that period for better terms’
Your new provider should arrange the transfer for you; if it’s the current year’s Cash ISA then you may only transfer the entire amount, but older ISAs can be transferred in part.
Fixed rate bond ISAs may charge a penalty in order to transfer the money into a new account.
It is possible to transfer a Cash ISAs to a Stocks and Shares ISA, and vice versa; as above, the current year’s ISA can only be transferred in full, and not all account providers will accept transfers.
Some accounts pay a bonus rate for the first year in order to tempt savers in but it is worth shopping around at the end of that period for better terms; your provider is obliged to allow you to transfer.
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