If you are paying tax on the interest gained through your savings account, you should consider a cash ISA. Any interest earned on a cash ISA is guaranteed to be 100% tax free, as opposed to the interest earned in a personal saving account that is taxable at your usual tax rate and must be declared as part of self-assessment.
What is a Cash ISA?
An individual savings account, also known as a cash ISA is essentially an account which pays interest tax free, as opposed to a traditional savings account in which the interest is not tax free. The features do not differ too much between a savings account and a cash ISA. However, the key difference is that there is a maximum limit of how much you can pay into a cash ISA in a tax year, whereas with a savings account there is not. Furthermore, with a regular savings account, you will gain interest on any amount in the account with no cut off point.
A Cash ISA Allowance
At the beginning of each tax year, you will receive a fresh, new ISA allowance. Every UK resident aged 16 or over will have the same cash ISA allowance. In the year 2017/2018 this will be £20,000. This amount of money can be:
- Held in cash
- In an innovative finance ISA
- Held in stocks and shares
They can be in these forms in any preferred combination. This means that a saver may for example save £20,000 with £10,000 held in cash, £5,000 in a finance ISA and a further £5,000 in stocks and shares. You are also entitled to use up to £4,000 of your allowance to put away and invest in a ‘Lifetime ISA’ to save for something bigger, such as a house or going towards your retirement fund.
For those aged 16 or 17, you may be entitled to an additional Junior ISA limit of £4,128 as well as the full adult ISA allowance. Nevertheless, if this is the case, you are not allowed to and cannot invest into a stocks & shares ISA or an innovative finance ISA until you have reached the age of 18.
The allowance is an individual limit. So, bear in mind that a cash ISA can only be held in a single name, and one ISA can be paid into only once per tax year. Joint accounts for a cash ISA are simply not an option. A married couple can take out joint accounts for other things, like a traditional savings account, but they must have separate cash ISA accounts.
Something to be aware of however, is that if you do not use your full ISA allowance by the end of the tax year, it does not carry over into the next year. You will therefore have lost that monetary allowance and will get a new allowance at the start of the proceeding tax year.
Can Cash ISAs be Transferred?
It is possible for you to transfer a cash ISA whenever you want and there is a specific process you are required to follow. In some cases, cash ISAs, particularly those of a fixed rate, may charge an interest fee when you transfer out of that account to another. Furthermore, if you are transferring money from an ISA that you have paid into during the current tax year, the whole amount is required to be transferred to the new account in question.
You are entitled to transfer cash ISAs into other cash ISAs. They can also be transferred into stocks and share ISAs, or vice versa. But be aware that not all providers will allow transfers from previous ISA accounts and some may incur additional charges and fees..