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A cash ISA is a savings account where you don’t pay tax on the interest you earn. It’s that simple! Everything you can do with a normal savings account you can do with a cash ISA. The tax-free bit is the only real difference.
In normal savings accounts, you’d get taxed on whatever you earned in interest. A cash ISA lets you keep 100% of the interest, which is why it has been a popular option among UK consumers for years.
Any person over 16 in the UK can put £20,000 into a cash ISA each tax year. Once your money is in a cash ISA, it stays tax-free year in year out.
In normal savings accounts, you’d get taxed on whatever you earned in interest. A cash ISA let’s you keep 100% of the interest, which is why it has been a popular option among UK consumers for years.
Like many things in banking, there’s no one all-encompassing “best” option. The ISA that’s best for you probably won’t be best for someone else, and vice versa. There’s a range of different ISA accounts to choose from, all designed to cater for different circumstances. These include Stocks and Shares ISAs, Help-to-buy ISAs and Lifetime ISAs to name just a few.
To find the best ISA for you, the best thing to do is to compare ISA accounts.
Help to Buy ISAs are a type of Cash ISA, their key distinction being that they are geared towards people buying a house for the first time. The big advantage to having one is that the government will chip in £50 for every £200 you put away, up to a limit of £3,000. You’ll also be paid interest by your bank or building society.
If you’ve already got a Cash ISA but want to change it to a Help to Buy ISA, this can be done by transferring the first £1,200 that entered the account to a Help to Buy ISA. You’ll then need to ensure that the remaining money is transferred into another type of ISA or that your provider who allows you to hold two ISAs in the same ISA wrapper.
Most cash ISAs are completely protected by the Financial Services Compensation Scheme (FSCS), which means that all deposits up to a total of £85,000 per provider are guaranteed by the government.
Since the EU referendum, the rates of British people putting their money into cash ISAs has halved. The recent decline of the cash ISA isn’t just down to Brexit, however. While recent numbers of people putting their money into ISAs has dipped, it is still a very popular way of holding on to savings.
In April 2016, the ISA was made a bit redundant. Under new government rules, basic-rate taxpayers don’t have to pay any tax on the first £1,000 of interest earned in banks. This is known as the ‘personal savings allowance‘ (PSA), and it has encroached on what used to be the territory of the cash ISA.
You’d be hard pressed to find any cash ISAs which can beat inflation. We’re living through a period which is difficult for savers hoping to protect their nest eggs.
Generally speaking, when interest rates are low people tend to save less and to spend and borrow more. Let’s clarify this with an example:
At the time of writing, inflation in the UK is at 2.5%. Put simply, this means a basket of shopping costing £100 this year will cost £102.50p in a year’s time.
Now imagine you’ve also got £100 in a cash ISA paying 1.13%. That £100 will be £101.13p next year.
Because interest rates are low, there’s less incentive to save. If you’re not saving you’re more likely to spend, and you’re more likely to borrow too because it will be cheap to do so.
Even though there are better rates available in different savings accounts and current accounts, ISAs still have their benefits.
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