A cash ISA (Individual Savings Account) is a tax-free savings account - meaning you don’t pay tax on the interest you earn.

The annual ISA allowance is £20,000, which can be split across different types of ISAs, allowing your savings to grow faster.

Any UK resident aged 18 or over can open a cash ISA. Children under 18 cannot open an adult ISA, but a junior cash ISA can be opened for them.

Upcoming ISA changes

From April 2027, new rules will limit how much some people can put into a cash ISA.

If you're under the age of 65, you'll be able to contribute up to £12,000 per year to a cash ISA, but if you want to use the full £20,000 ISA allowance, the remaining £8,000 must go into either a stocks & shares ISA or another non-cash ISA.

Those aged 65 and over can continue to use the full £20,000 allowance in a cash ISA.

A cash ISA is worth thinking about if you want to earn interest on your savings without paying any tax - especially if you’re likely to exceed your tax-free allowance from savings across other accounts.

Most savers can earn some interest tax-free through their personal savings allowance, which means standard savings accounts can still be efficient. However, a cash ISA becomes particularly useful if your savings are large enough that you might start paying tax on that interest.

Your personal savings allowance depends on your income tax band:

• Basic rate taxpayers (20%) can earn up to £1,000 in interest tax-free

• Higher rate taxpayers (40%) can earn up to £500 in interest tax-free

• Additional rate taxpayers (45%) have no allowance, meaning all interest may be taxable

A cash ISA works in a similar way to a standard savings account - but remember these six points.

1. You can open and pay into more than one cash ISA in a financial year

This means you can spread your money across a fixed-rate cash ISA and an easy access cash ISA.

2. All the money you make in interest is tax-free

The tax-free benefit is a huge advantage to a cash ISA because it means you'll maximise the interest earned. Remember your ISA allowance resets every tax year on April 6. Any unused balance does not roll over into the next year.

3. You can only pay in £20,000 per person each year

You can deposit up to £20,000 per person each tax year across all your ISAs. This is your total annual ISA allowance, so if you have more than one type - such as a cash ISA and a stocks and shares ISA - you’ll need to split the limit between them.

Remember, from April 2027 the rules change and you’ll no longer be able to put the full £20,000 allowance into just a cash ISA if you’re under 65.

4. Flexibility and withdrawals

Wile some cash ISAs are flexible - meaning you can withdraw money and replace it within the same tax year without affecting your annual allowance - others aren't. Any withdrawals will count towards your limit, so check whether your ISA is flexible, especially if you think you might need access to your savings.

5. Transfers

You can transfer money from one cash ISA to another without losing your tax-free status - but it’s important to do this through the ISA provider, not by withdrawing the funds yourself. Most providers accept transfers in but it’s worth checking how long the process takes and whether any restrictions apply.

6. There are different types of cash ISAs

It's important to explore the different types of cash ISAs before moving your money, as they are designed for different savings goals. For example, a fixed-rate cash ISA might have a competitive interest rate but your money is locked away for a set period. This differs from an easy access cash ISA as you can normally withdraw money when it suits you, but rates can be lower.

The best cash ISA rates right now are sitting at around 4.5% AER+ for some fixed-term and easy access deals. Rates change often and typically in line with the Bank of England's base rate, which they recently announced in late April will again remain at 3.75%.

The highest rates are often found on fixed-rate cash ISAs - where you lock your money away for a set period. Easy access ISAs may pay slightly less, but they give you the freedom to withdraw your savings when you need to.

If you’re looking for the best ISA rates then it’s worth comparing deals regularly and checking the account terms. A higher rate isn’t always the best option if it comes with restrictions that don’t suit how you want to save.

Choosing between a cash ISA and a stocks and shares ISA depends on your goals and how comfortable you are with risk. Let's take a look at them both in a bit more detail.

Cash ISA

A cash ISA works well if you want to protect your money and earn steady interest, meaning:

• You want low risk and no surprises

• You may need access to your money in the short term

• You are saving for something in the next 0-5 years

• You prefer guaranteed returns, even if rates can change

Stocks and shares ISA

A stocks and shares ISA works if you're happy to take some risk for the chance of higher returns. That might mean:

• You are investing for the medium to long term - generally 5+ years

• You can handle ups and downs in value

• You want the potential to grow your money faster than standard interest rates allow

• You don’t need to access the money soon

Remember, you don’t have to choose just one. Many people split their ISA allowance between cash and investments - giving a mixture of stability and growth.

There are many alternatives to a cash ISA, but where to save for the best returns depends on what you want to do with your money and when you need access to it. Here are some of the main options to consider:

• Stocks and shares ISAs - put money into shares and other investments without paying income tax or capital gains tax on the growth. Stocks and shares ISAs are best for long-term savings, so you can ride out any market volatility.

• Standard savings accounts - you won't pay tax on the first £1,000 of interest you earn if you're a basic rate taxpayer, although this drops to £500 if you're a higher rate taxpayer and £0 if you’re an additional rate payer.

Cash ISA FAQs