Cash ISA (Individual Savings Accounts) Explained

ISA is an abbreviation for "Individual Savings Account"; as the name suggests this is essentially a basic savings account, but with the advantage that returns on investment are not liable for capital gains tax or income tax.

Investors born on or before April 5th 1960 can invest up to £10,200 into a Cash ISA and £7,200 for anyone else born after 5 April 1960. The rate at which your investment accrues interest however varies from one cash ISA to another, and you may also come across different access conditions – instant access, access subject to notice, or fixed term access (typically a year, or more) – amongst otherwise similar products.

Cash ISA Features, Benefits & Considerations

The principle benefit of a cash ISA is, of course that any income that your investment earns, through interest is not taxed, so returns on investment are higher. This is in contrast to standard savings accounts, where interest is taxed at 20%, or even 40%, if you are a higher rate taxpayer. Investment in savings, rather than in the stock market – as is the case with a so-called "stock and shares" ISA – also means that your investment is secure and more easily accessible.

The interest rate paid is obviously paramount to the effectiveness of a cash ISA and in the past higher interest rates were typically associated with notice or fixed rate accounts, rather than those that allow instant access. This is not always the case nowadays so it may pay to shop around for the cash ISA that best suits your own requirements. In doing so do take heed of the small print in any cash ISA agreement; it is not uncommon for a cash ISA to be advertised at an attractive, "headline" interest rate only for the small print to reveal that the rate is only guaranteed for a short introductory period. If this is the case, you do need to make a mental note to move your ISA to another provider at a preferential interest rate, once the introductory period runs out, or to choose a provider that offers a lower interest rate, but one that is consistent over the whole fiscal year, in the first place.

If you do need to switch a cash ISA between providers, for whatever reason – a fall in the interest rate offered at the end of an introductory period, a failure on the part of your bank or building society to raise the interest rate to reflect that available elsewhere, etc. – make sure that you do exactly that. If you close your current cash ISA instead – with a view to opening a new account elsewhere – you will lose some, or all, of your ISA allowance for the current tax year. Switching a cash ISA typically just involves completing a transfer form for a new provider, who deals with all aspects of moving your money, etc., but, moreover, ensures that your tax benefits remain intact.