How to use cash ISA savings accounts to maximise the interest you earn on your savings.
Regardless of whether you are new to savings or already have a substantial amount tucked away, if you don't have a mini cash ISA, you're letting the tax man get away with a slice of your earnings unnecessarily.
All UK tax payers have at least 20% deducted as tax (40% for higher tax payers) from the interest they earn on their savings. Thankfully we are all granted a yearly ISA allowance to provide us with some relief from this; of this £7,200 allowance, up to £3,600 can be invested as cash (this increased from a total allowance of £7,000 and cash allowance of £3,000 on 6th April, 2008). (Click here to visit our ISA Guide).
What is a Cash ISA?
A cash ISA enables you to take advantage of this tax free allowance while operating your money from a regular savings account, meaning a better return on your money for relatively little effort. Cash ISA accounts are available from most UK banks and building societies and can be opened by any UK resident over the age of 16, making them a great place to grow your savings.
You are given a new ISA allowance each financial year (this runs from the 6th April one year to the 5th April the following year) meaning that you can save up to £3,600 in your cash ISA each year and it would keep its tax free status indefinitely. However, any allowance you don't use, you lose.
Additionally, while it’s possible to hold more than one cash ISA (technically you can choose to open one with a different financial provider each year) you are only allowed to pay into one each financial year. So, before you contribute a single £1 its vital you check that you're happy with the ISA you currently have. If you do pay into more than one cash ISA within a financial year, your money is likely to lose its tax free status.
What's more, while your money gains its tax free status as soon as you invest it in an ISA, you are only able to pay in a maximum of £3,600 each tax year. This applies even if you have made a withdrawal. For example, if you pay £3,600 to your ISA on April 6th, even if you later withdraw £600 (so the balance becomes £3,000) you would not be able to pay in a single penny more until the start of the next tax year as you would have already used your full tax free allowance.
Making the most of your Cash ISA
Investing your money in a Cash ISA will only be profitable if you choose an account that pays a decent rate of interest. Ideally, you should look for an account that at least matches the Bank of England Base Rate otherwise you money will actually be shrinking in value.
- Be wary of introductory interest bonuses that hide a mediocre account, unless you are willing to transfer your money once the initial rate expires.
- Watch for withdrawal penalties if you're likely to need access to your money as these can significantly dint your interest return.
- Keep a keen eye on the interest rate paid on your Cash ISA; banks and building societies can often change these without notice so vigilance is a must to keep your account profitable
- If you're happy to tie your money up for a while it may be worth thinking about a fixed term ISA product as these generally guarantee fixed rates for the fixed term. However, as with any bonus account, make sure you make a note to switch after the fixed period ends.
Can I transfer my Cash ISA?
If you've taken a look at the interest rate your current ISA is paying and are horrified by how uncompetitive it is, it could well be worth your while looking to transfer to a more profitable account. A word of warning however, never, ever, ever simply withdraw cash from your Cash ISA when looking to transfer as you will immediately lose this allowance and will have to start afresh and use up your valuable new allowance to reinvest it.
Instead, when looking to transfer you should fill in a form with your new ISA provider (this will authorise them to transfer your money across) and notify your existing ISA provider of your plans (preferably in writing). You should however first make sure that you will not be penalised by your existing provider for transferring your money out of the account. If there is a withdrawal penalty you will need to do the maths and work out whether the interest gained by transferring will be more than that lost in penalties.
Do bear in mind that some ISA accounts will not allow you to open them with transfers from previous years entitlements - this is always something you should check when looking to open a new cash ISA account.
From 6th April 2008 it will be possible to transfer funds saved in a Cash ISA to a stocks and shares ISA, before this date it was only possible to transfer funds accumulated in what was a mini cash ISA account to another mini cash ISA. Additionally, while your ISA allowances from previous years can be split between different providers, the funds in your current year's ISA have to be transferred whole.
Compare savings accounts via money.co.uk
