What is a cash ISA and how does it work?

Important: This article is for general guidance purposes only and should not be considered financial advice. Tax treatment will depend on your individual circumstances and could potentially change in the future.

Saving with an ISA

When the Bank of England raised the base interest rates in 2022 and 2023, savings rates rocketed to their highest levels in over a decade.

Bank of England data shows savers poured £11.7bn into ISAs when the new tax year started in April 2024, the highest monthly inflow since ISAs were introduced in 1999. Meanwhile, Bank of England statistics show that the national Cash ISA balance increased by 31.5% since the base rate increased above 2% in September 2022. With ISAs on the rise, make sure you’re informed with this handy guide to cash ISAs.

What is a cash ISA?

A cash ISA is a savings account that allows you to save up to £20,000 each tax year and earn interest on your money without paying any UK income tax. You need to be over 18 years old and a UK resident to open one.

A rule change that was introduced in the 2024/25 tax year allows you to open and put your money into more than one cash ISA in a single tax year. You can also spread your annual allowance across different types of ISAs.

The pros and cons

Of course, it depends on your personal circumstances and goals, but cash ISAs are one way to potentially lower your annual tax bill.

The interest you can earn across your non-ISAs — such as your current or savings account with your bank — is what’s known as your ​​personal savings allowance. If you’re a basic tax rate payer, then it’s £1,000; a higher rate payer can earn £500, while an additional rate payer has no exemption and has to pay tax on all non-ISA interest accounts.

Putting money in a cash ISA allows you to build up a nest egg that doesn’t eat into your personal savings allowance.

What’s more, if your cash ISA is flexible, you can transfer your cash ISA to another provider at a later date and it won’t affect your annual allowance for that tax year. There’s also no limit to the number of ISAs you can transfer between providers.

If you have a fixed-rate cash ISA, you’ll be given maturity options when your fixed period comes to an end. Your provider will usually offer you the opportunity to reinvest in a new fixed-rate cash ISA, move the money to an easy-access cash ISA, or transfer to another provider.

The new rule in April 2024 also means you can make partial transfers of money deposited in previous tax years, but if you want to transfer money invested during the current tax year, you must transfer all of it.

How much interest can you earn?

​Generally speaking, there are two types of cash ISAs: ‘easy access’, where the interest rate can go up and down depending on what the Bank of England does with the base rate; and ‘fixed rate’, which guarantees a rate for a fixed period.

The trade-off between the two is that easy-access cash ISAs give flexibility but typically offer lower interest rates than fixed-rate cash ISAs. This is partly because you could benefit from any interest rate increases your provider passes on.

Read more on what is the difference between gross and AER?

What about deposits and withdrawals?

Whether you choose to open an easy access cash ISA or fixed rate cash ISA, it’s important to take your time to read the requirements and small print carefully.

While most providers will allow you to open a cash ISA with a £1 deposit, others may require a minimum of £500 or £1,000. There will also be rules regarding when, how often and how much you can withdraw from your savings.

With most fixed-rate cash ISAs, you can’t withdraw until the fixed rate has matured, but others allow between one and three withdrawals. You can close your account before the end of the fixed rate period, but you will most likely have to pay an early access charge equivalent to the interest earned since you locked it away.

Easy access cash ISAs give you the option of withdrawing from your savings. Some providers will allow you to make unlimited withdrawals, while others will limit you to a certain number, but if you go over this then you may end up earning a lower interest rate. ​Any cash you take out of a flexible cash ISA can be put back in without impacting your current year’s allowance.

Will there be any changes to cash ISA rules in the future?

In the lead-up to the first budget of the new Labour government there had been much speculation about what the Chancellor of the Exchequer, Rachel Reeves, might announce. 

In the end, Reeves made no changes to cash ISAs and decided to freeze the £20,000 annual subscription limit until 5 April 2030.

Keeping up to date with any changes to the cash ISA rules and how they may impact your savings can help you manage your finances confidently.