Using cash ISAs to save money
6th Nov 2015
If you’ve never looked into saving in a cash ISA before, you probably think that they’re a lot more complicated than they actually are. To prove that this isn’t true, we’ve put together this guide to sift through all the jargon and explain everything that you need to know about cash ISAs in basic terms.
What is a cash ISA?
A cash ISA is a savings account that sees you pay no tax on any of the interest you earn. There is another type of ISA available: a stocks and shares ISA, and with this you put your money into a range of different investments instead.
Who can open a cash ISA?
To open a cash ISA, you need to be a UK resident and aged 16 or over. Unlike savings account, you can’t open an account together with someone else or on their behalf (unless for your child, of course).
How does a cash ISA work?
Each tax year (starting April 6th) you get an ISA allowance which sets the maximum that you could save within an ISA – for the tax year 2015/16 the limit is set at £15,240. You’ll earn tax-free interest on any of the savings that you put in.
You can only open one cash ISA per year, and how much access you have to one will depend on the type of ISA you pick. There are instant access cash ISAs which will let you withdraw your money whenever you want to, or fixed-term cash ISAs which will only give you access to your money once your term is over. You may face charges when wanting to withdraw early from a fixed-term ISA or when wanting to transfer your money across to another provider.
For your ISA to count for the tax year, you have to make sure that you save by the 5th April. Any unused allowance for the year doesn’t roll over with it – so use it or lose it! Any savings that stay within the ISA will continue to earn interest and remain tax-free until you withdraw it.
Recent changes to Cash ISAs
Before new rules were introduced in 2014, you had to divide your ISA allowance up into cash and investments. With the introduction of NISAs (New Individual Savings Accounts) in July 2014, these rules were relaxed to give increased freedom in how you split your allowance up – if you decide to at all!
There will be more changes to ISAs coming this autumn, with the introduction of flexible ISAs. Plans for this were first introduced in the Budget earlier this year but the changes are only now coming into effect. As part of this, you’ll be able to take money out of your ISA and put it back in, without this counting towards your ISA allowance for the year. Help to Buy ISAs are also come on the market in a few months, find out more about them here.
Is my money safe in a Cash ISA?
Yes, but only as long as you open one with a bank or building society that is authorised by the Financial Conduct Authority (FCA). By doing this, you’ll be protected under the Financial Services Compensation Scheme (FSCS). This scheme guarantees that if anything were to happen to your bank, building society or credit union, you’ll be refunded savings of up to £85,000. This protection limit is changing to £75,000 as of January 1st 2016.
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