Cash ISAs are one of the most popular types of investment accounts, giving investors tax-free interest on their savings. If you save in an ordinary account, you’ll have to pay income tax on any money that turns over. However, if you save inside a cash ISA, all your gains are untaxed, regardless of whether they come from interest payments or capital growth.
How do cash ISAs work?
Cash ISAs were first introduced by the government in 1999, allowing savers to keep their tax-free allowance. It means that if, say, you’ve got £10,000 inside cash ISA, you won’t have to pay any income tax on the interest it accrues during that year. Instead of getting taxed at your usual rate, which could be as high as 40%, earnings are left untouched until you withdraw them. If you’re a basic rate taxpayer who would only pay 20%, this has the effect of doubling your savings. Meanwhile, the rules guarantee that the government will never levy an above-inflation charge on withdrawals.
This is good news for people expecting to live off their savings in later life or who wish to leave their money to their children. It’s also possible for married couples and civil partners to have a joint cash ISA, giving them an even greater tax-free allowance. This means that they could shelter up to £20,000 from the government each year without paying any income tax whatsoever.
Different types of ISAs
There are many different types of ISAs available;
One type that is particularly popular with savers is a cash ISA. Cash ISAs in London is becoming increasingly common among people who want to make their money work harder for them, especially with rock-bottom interest rates on most savings accounts at the moment. So what are they, and how do they compare to other types of ISAs?
A cash ISA enables individuals or businesses to earn tax-free interest on their savings. Each year, the amount you can put into a cash ISA varies depending on which provider you choose and which type of account you opt for. In some cases, the maximum amount you can deposit into a cash ISA isn’t much more than current savings account rates – for example, this year (2017), the best rate on an easy-access cash ISA is 1.25% from Coventry Building Society; it’s widely available at around that rate despite only allowing deposits up to £500 each tax year.
Cash ISAs may also come with caps on how much interest they offer, but many accounts offer variable interest rates and no ceiling on the amounts you can save. These may be called flexible or notice cash ISAs; providers often use these names interchangeably, although technically speaking, notice accounts require advance notice if you want to withdraw your money, usually seven days in most cases. It’s also worth noting that you can hold flexible and notice ISAs in the same tax year, although if you choose to do this, your total contributions for the year cannot exceed your annual allowance.
Flexible cash ISAs may be helpful if you want to access your money without giving too much of a time commitment. However, remember that you’ll need to meet any withdrawal conditions attached to these accounts before being able to get at your cash. If you don’t think there’s a chance of having to make a withdrawal from your cash ISA, you might prefer a fixed rate, but bear in mind that these tend not to offer the top rates on the market and come with a one-year expiry date.
They can also help savers sidestep some other charges associated with other types of investments accounts. People can be charged fees for selling them and moving them elsewhere, but these rules don’t apply with cash ISAs. This makes it much easier to transfer your investments between providers without worrying about penalties.
New investors who want to open a UK isa account should contact a reputable online broker from Saxo bank.