We all love free money 🤑
When you put your savings in an account which pays interest, the money you can earn is like getting something for nothing!
If you’ve managed to build up a stash of cash, you may now be wondering where the best place to store your savings is.
Introducing you to Cash ISAs, otherwise known as Individual Savings Accounts 🤝 You can bag interest on your saved cash without paying any tax. The catch is you’ll often have to sacrifice instant access to your money.
But how do Cash ISAs work? Should you get a Cash ISA? And how do I find the best Cash ISA with the best interest rates?
Read our Cash ISA guide to find out what is a Skipton Cash ISA 🌞
What is a Cash ISA?
A Cash ISA is a type of savings account that lets you earn tax-free interest on your deposited savings. You can put up to £20,000 into an ISA per tax year.
As mentioned, ISA stands for Individual Savings Account. There are 4 main types available:
- Cash ISA
- Stocks and Shares ISA
- Lifetime ISA
- Innovative Finance ISA
You must be a UK resident aged 16 or over to open a Cash ISA, however Junior ISAs are available for eligible UK residents under 18 👧
Cash ISAs will generally have higher interest rates than high-street bank accounts. However, the higher tax-free interest rates may often come at the cost of having less access to your money than a standard bank account.
Where do Cash ISAs fit into my financial journey?
Cash ISAs work great for emergency funds. If you have paid off any debts you may owe, then building an emergency fund will be the next priority in your financial journey.
With the savings you bring together here, you can be prepared for weathering any possible financial storms in the future. You can refresh yourself on the benefits of emergency funds here.
Cash ISAs are a great candidate for emergency funds because, depending on the type of account you open, they provide easy enough access to your cash. They also give better returns than a standard high-street bank account, protecting your savings from inflation. So, if your car suddenly gives up, your Cash ISA fund is there to dip into 🚗
Cash ISAs are a safe option for savings, since they are protected by the Financial Services Compensation Scheme (FSCS). This means that should something happen to the bank itself, you could benefit from the FSCS and claim up to £85,000 of your money back from the bank, if the scheme applies to you.
What is the Cash ISA limit?
The annual limit for Cash ISA contributions is £20,000 per tax year (the current UK tax year runs from 6th Apr 2021 – 5th Apr 2022). Any interest paid on your savings up to this amount can be earned tax-free.
Eligible UK adults are granted an annual ISA allowance of £20,000, but you don’t have to save it all into a Cash ISA. You can spread this personal allowance between ISA types e.g. a Stocks & Shares ISA and a Lifetime ISA.
However, you may only hold one account for each ISA type.
What is a Skipton Cash ISA?
Skipton is a building society and offers two Cash ISAs:
1) Easy Access Cash ISA: 0.45% AER; flexible withdrawals; minimum deposit of £1
2) Fixed Rate Cash E-ISA: up to 1.35% AER depending on fixed term; restricted access; fixed terms ranging from 1 year to 5 years; minimum deposit £500; no withdrawals.
Which type of Cash ISA should I get?
If you’re interested in opening a Cash ISA, it’s important to consider what type best fits your financial goals. There are a variety of Cash ISAs available in the UK:
Easy Access ISA
An Easy Access ISA is just that, easy to access. You’re able to pay in and take out money whenever you like, provided you stay within the annual £20,000 allowance.
It’s important to note that not all accounts will allow you to withdraw money and pay it back in without affecting your annual allowance. If you take out, let’s say, £1000 and put it back in later, the £1000 will still count towards your allowance.
Fixed Rate ISA
Interest rates are often higher for Fixed Rate ISAs than other types, and will remain static over the course of your account. The compromise is that you will have to lock away your money for a set period of time, often between one and five years 🔐
This is a good option if you can afford not to touch your money and you already have an emergency fund available.
In the scenario that you wish to make a withdrawal before the fixed term ends, you’ll likely receive a hefty penalty fee. Make sure you feel comfortable locking away your cash, or be prepared to pay the fees.
Notice ISAs act as a hybrid between Easy Access and Fixed Rate ISAs. You can access your money without locking it away, but will have to give prior notice before withdrawing. This could be any period between a week and 120 days, depending on your provider.
In some cases, you may be able to request an early withdrawal before the end of the full notice period. However, your provider is likely to (you guessed it) charge a fee.
If being able to withdraw and redeposit money is important to you, then a Flexible ISA may be more up your street.
Many providers now offer Flexible ISAs, which allow you to withdraw money from your account and then replace it, without affecting your annual £20,000 ISA allowance.
A Flexible ISA can be applied to Easy Access and Fixed Rate ISAs, but make sure you do your research as not every provider will offer this.
If you’re looking to save for your first home or retirement, you may want to open a Lifetime ISA as either a Cash ISA or Stocks and Shares ISA🏡
Lifetime ISAs are designed for long-term saving (they are called ‘lifetime’ ISAs after all). You may only withdraw money to buy your first home, or when you turn 60.
LISAs have a contribution limit of £4000 per tax year, which also counts towards your general ISA limit of £20,000. The benefit of a LISA is that the government will add a 25% bonus to your savings. You can read our earlier guide on Lifetime ISAs here.
How to compare and find the best Cash ISA rates
When opening a Cash ISA, it’s important to compare different accounts and their interest rates to find the best for you 👑
Bear in mind that accounts with the highest rates may not always be the best option for you, as you’ll likely have to compromise on other important features, such as flexibility.
Here are some things to bear in mind:
1. Think about how accessible you need your Cash ISA to be. You’ll need to weigh up your long and short term priorities.
A Fixed Rate ISA may offer higher interest rates, but you’ll need to commit to locking away your money. Alternatively, an Easy Access account sacrifices higher rates for more flexible access.
2. Consider how prepared you are to keep track of ISA interest rates. Cash ISAs with a variable rate can change their interest rates at any time. You may want to keep an eye on the rate and be open to switching providers for a better deal 👀
Fixed Rate ISAs will guarantee you a particular interest rate. But if interest rates increase, you could be missing out on a better deal elsewhere until your fixed period ends.
3. Shop around to compare ISA providers and their rates. You’ll want to weigh up each account’s interest rates, but also their flexibility, accessibility, any possible charges, and the provider itself.
There are many comparison websites out there, and it’s worth remembering that some providers may not feature on particular websites.
You may have to compare multiple sources or even go directly to a provider for their rates. And as always, do read the small print about any variable rates or fixed-terms to ensure you’re getting the best deal.
How many Cash ISAs can I have?
You may only contribute to one Cash ISA within any given tax year. But there’s nothing stopping you from contributing to other types of ISA, such as a Stocks and Shares ISA. Just make sure you don’t exceed the combined allowance of £20,000 across these accounts.
Alternatively, if you really do want to switch account, you can open a new Cash ISA with a different provider when the new tax year begins, after April 6th. In this case, you may only contribute to your new ISA within that tax year, and not any existing ones.
Can I transfer my Cash ISA to another provider?
You can usually transfer your Cash ISA savings to another provider or different type of ISA, such as a Stocks and Shares ISA, at any time. This allows you to take advantage of the best interest rates or switch to a better suited account.
To complete the transfer you will need to contact your new provider and fill out an ISA transfer form. It’s important you don’t withdraw your money and set up a new account yourself, as you may lose some of the ISA’s tax benefits or face transfer fees 🙈
Do consider if the cost to transfer is worth the attractive interest rate, as it could actually cost you more time and money to switch.
Cash ISA vs Savings Account
Since interest rates for Cash ISAs are often lower than regular savings accounts, some savers may opt for a savings account to store their money. In choosing between the two, bear in mind:
As discussed, a Cash ISA only permits you to save up to £20,000 each tax year. With a Savings Account, you can deposit as much as you’d like (unless your bank imposes a limit).
For many savers, the £20,000 limit is higher than what they aim to save per tax year, making an ISA suitable. However, if you’re planning on saving more than £20,000 each tax year, it might be worth looking at alternative savings solutions.
Though any interest earned on money in a Savings Account could be liable for Income Tax, this only applies to basic-rate taxpayers who earn over £1,000 in interest a year, or £500 for higher rate taxpayers. This is known as your personal savings allowance.
£1,000 is a lot of interest for one tax year, so unless you’re saving significant sums or interest rates start to creep up, you’d probably be safe keeping your money in a regular Savings Account for now 💰
However, additional rate taxpayers don’t have a personal savings allowance, so if you have a LOT in savings, or are an additional rate payer, a Cash ISA might make more sense for you.
Alternatives to Cash ISAs
Interest Pockets with Plum
If you’ve weighed up the various pros and cons of ISAs vs Savings Accounts, and decided you want to make use of your personal savings allowance, you could open an Easy Access Pocket with Plum. Provided by Investec, these pockets pay 0.25% AER interest and are available to all Plum users, meaning you can fight inflation and earn a return on your savings.
However, we’ve reserved the best rate for our Plum Plus, Plum Pro and Plum Ultra subscribers. With a Plum subscription you can open additional pockets which pay 0.40% AER 🦄
Access to your money is quick and easy as withdrawals can be made within one working day.
Stocks and Shares ISA
If you’ve managed to clear all of your outstanding debt and built up an accessible emergency fund, you might want to think about the next step in your financial journey. This could involve dipping your toes into investing, provided you feel financially prepared and have done your research.
As part of your ISA allowance, you can invest up to £20,000 into a Stocks and Shares ISA each year. This ISA will allow you to invest in a variety of funds, bonds and individual companies without paying tax on any potential returns 📈
Be aware however that your capital is at risk. Your investment could go up or down, so only do so if you’re prepared to take the risk. If you’re new to investing, brush up on the basics with our beginner’s guide to investing.
Apps like Plum can even automate the process for you, allowing you to save and invest in the background without having to lift a finger.
If you'd like to learn more about Plum then you can check out our website.
And if you’re not yet ready to save in a Cash ISA because you're still in debt, read our article on overdrafts and how to get out of your overdraft.