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The 10 most common cash ISA questions answered

The 10 most common cash ISA questions answered
Paloma Kubiak
Written By:
Paloma Kubiak
Posted:
17/05/2024
Updated:
17/05/2024

We're in the swing of the new tax year, which brings ISAs into focus. If you have a burning cash ISA question, chances are, you're not alone.

What are the most commonly asked cash ISA questions savers search for on the internet?

Paragon Bank trawled through internet search engines to compile a list of the top 10 questions, answered by Derek Sprawling, savings managing director.

1) Are cash ISAs tax free?

Yes, cash ISAs protect your savings interest from tax. You can save up to £20,000 per tax year into a cash ISA, or split that allowance between cash and stocks and shares ISAs.

If you’re aged between 18 and under 40, you can also open a Lifetime ISA, in which you can invest £4,000 of your £20,000 allowance.

Cash ISAs are different to your Personal Savings Allowance (PSA), which allows individuals to earn a certain amount of interest on their savings without having to pay income tax on it.

The current thresholds are:

  • Basic rate taxpayers: Up to £1,000 of interest income is tax-free
  • Higher rate taxpayers: Up to £500 of interest income is tax-free
  • Additional rate taxpayers: There is no PSA, meaning all interest income is subject to income tax

As savings rates have increased over the past two years, more individuals have been exposed to paying tax on their savings interest held in non-ISA accounts.

2) How many cash ISAs can you have?

Under changes introduced by the Government for the 2024/25 tax year, savers have the option to open multiple cash ISAs with different providers.

Some providers, such as Paragon, also allow savers to pay into multiple cash ISA accounts.

For example, you could put half of your £20,000 ISA allowance into a five-year fixed rate, £5,000 into a one-year fixed rate account and keep £5,000 in an easy-access account for emergency spending. You’ll need to speak to your provider to understand which of the new freedoms they’ve been able to implement so far.

3) Can cash ISAs be in joint names?

No. A cash ISA can only be opened in an individual’s name (Individual Savings Account).

This does mean, however, if you and your partner each invest in your own ISA, you may be able to save more money between you.

4) What is an ISA transfer?

An ISA transfer allows you to move money built up in your ISA wrapper. There is no limit on the number of ISAs you can transfer from previous tax years, you can make the transfer at any time and you can transfer the full amount or make a partial transfer.

Transferring cash between providers is relatively simple. Once you have instructed your new provider, it will contact your existing provider and manage the transfer on your behalf. Don’t remove the cash and take it to a new provider, as you’ll lose the tax-free status on your cash. Always complete a transfer form.

However, keep an eye out for any interest penalties that you may incur for transferring out of fixed or notice accounts.

5) Can cash ISAs be transferred to a stocks and shares ISA?

Yes, you can also transfer money built up in your ISA from previous tax years between cash ISAs and stocks and shares ISAs, and vice versa.

6) What happens when a cash ISA matures?

A fixed rate ISA matures when it reaches the end of its fixed-term period. Most providers will contact you, usually a month in advance, as you reach your maturity date to check what you would like to do.

You will typically be presented with maturity options, such as transferring to another fixed rate ISA, or other account, with that provider.

If you choose to do nothing or do not provide your ISA provider with any instructions, the balance will usually be transferred into an easy-access cash ISA, although some providers do roll your cash into another fixed-term product so keep an eye out for that.

7) What’s the minimum age to open a cash ISA?

You must be 18 years of age to open a cash ISA, recently up from the previous age of 16.

8) Which cash ISA is best for me?

This depends on your individual circumstances. Cash ISAs are typically available in access, notice or fixed-term variants, and whichever you choose should reflect your specific needs. For example, if you are happy to lock your money away for a period of time in return for a better rate, then a fixed-term product may suit you.

Alternatively, if you want to retain access to your cash, then an access or notice account may be preferable.

As highlighted, some providers will allow you to open cash ISAs with more than one provider in the same tax year, but there aren’t many of those currently. I’d expect this availability to increase over time.

9) Why open a cash ISA?

Cash ISAs are an attractive option for savers to build a pot in a tax-efficient way.

As we have seen over the past two years, the number of savers in non-ISAs liable to pay tax on their savings interest has grown significantly for several reasons.

For example, as rates have increased, the savings balance required to generate sufficient interest to incur tax has reduced. Additionally, as wages have increased in a high-inflation environment, the number of people moving into the higher and additional rate tax bands has also grown, reducing their PSA.

If you intend to build a sizeable savings pot over a long-term, then ISAs are a sensible option to protect that money from the tax collector, now and in the future.

10) Will cash ISA rates go up?

Savings rates are influenced by a number of factors, including expectations of the Bank of England base rate, the demand for lending and the rates at which the banks offering the savings might reasonably be able to charge a borrower in coming years.

As inflation has eased in recent months, the expectation is that the base rate will reduce imminently. As a result, savings rates have also reduced slightly, although rates are still attractive and many are above the rate of inflation, which means your money is growing in real terms.