What is a Cash ISA?

5 minute read time

At a glance:

  • A Cash ISA is a type of individual savings account that offers tax-free interest
  • You can open as many Cash ISAs as you like, but can deposit a maximum of £20,000 across all your ISAs each tax year
  •  Cash ISAs can be opened by any UK resident aged 18 and above

How does a Cash ISA work?

A Cash ISA is a UK savings account offering tax-free interest. This means that any interest earned in a Cash ISA does not count towards your personal savings allowance (PSA) of £1,000 for basic rate taxpayers, and £500 for higher rate taxpayers.

There are two main types of Cash ISA available:

  • Fixed rate Cash ISA – the rate of interest paid on these Cash ISAs stays the same for the whole term. However, there may be limits on how often you can access your money.
  • Easy access Cash ISA – your money is available to withdraw, but the interest rate is variable and can change during the term of your Cash ISA.

Other types of Cash ISA include Lifetime ISAs and Junior ISAs, although these have additional rules relating to who can open them and how much money can be paid into them. 

Read more about ISA allowances

How much can you put in a Cash ISA?

Each tax year, you can save up to £20,000 across your individual savings accounts. You can choose to pay into a Cash ISA only, or you can choose to spread your ISA allowance across Stocks and shares ISAs and Cash ISAs. It’s completely up to you.

Read more about Stocks and shares ISAs

Can you have more than one Cash ISA?

There’s no limit to how many Cash ISAs you can open within a single tax year. You just need to remember to stay below the £20,000 personal allowance total across all your ISAs each tax year. The exception to this is the Lifetime ISA, as you can only put money in one Lifetime ISA, whether that be cash or stocks and shares, in each tax year.

There are several reasons why opening more than one Cash ISA could be right for you. It depends on your individual situation, how much you have to save, when you want to access your cash, and how long you’re willing to lock it away. Fixed rate Cash ISAs may have attractive interest rates but often prohibit withdrawals or come with significant penalties if you need to access the money before the end of the term.

Alternatives to a Cash ISA

1. Savings account

The most obvious alternative to a Cash ISA is a standard savings account. These have no limit, meaning you can invest more than £20,000 each year, if you have that money available. However, they offer no tax protection, so any interest earned in these accounts above the personal savings allowance (PSA) is subject to tax. 

Head over to our Cash savings hub to see a full list of savings accounts, where we've collected some of the best interest rates in the market. All our accounts are protected by the Financial Services Compensation Scheme (FSCS) covering up to £85,000 per bank. 

2. Stocks and shares ISA

Another alternative is the Stocks and shares ISA, also called an investment ISA.

This account allows you to invest money for the long term, and with it being an ISA, any gains are protected from the taxman, and yours to keep.

As you’d expect, the £20,000 limit also applies to the Stocks and shares ISA.

Can you transfer a Cash ISA to a Stocks and shares ISA?

Yes, you can transfer from a Cash ISA into a Stocks and shares ISA.

If you decide to open a Stocks and shares ISA and want to move money into it from your Cash ISA, a transfer is the best way to do that. By transferring from one ISA to another, your money will never leave the tax-free wrapper, meaning it has no impact on your ISA allowance. 

However, if you were to withdraw your money from a Cash ISA and then pay into a Stocks and shares ISA, this payment would count towards your £20,000 ISA allowance. For example, paying £1,000 into a Cash ISA would reduce you remaining allowance to £19,000. If you then withdrew this and paid it into a Stocks and shares ISA, your allowance would reduce by another £1,000 to £18,000. Transferring the money directly between ISAs instead would avoid this second reduction, keeping your allowance for the tax year at £19,000.

When investing in stocks and shares, it is important to use money you won’t need in the short term. Typically, the recommended timeframe for investing is five years. If you’ll need the money sooner than that, it may be better keeping it in cash. However, personal discretion is advisable.

Cash ISA vs Stocks and shares ISA – which is right for you?

So, which account is better suited to your needs? It’s up to you to decide where your savings are kept, but this isn’t a choice of one or the other. Both Cash ISAs and Stocks and shares ISAs have a role to play in personal finance, alongside other similar account types.

As mentioned earlier, it depends on your risk appetite and savings goals whether cash or investments are right for you. If you’re expecting to make a big purchase soon, such as a new car or house, then Cash ISAs and savings accounts offer more security and a guaranteed return.

However, if you’re planning to stash your money away for a long time, and don’t mind the value of your accounts moving up and down, it might make more sense to invest. Historically, investing has outperformed cash over the long term – but this is not guaranteed, and you could get back less than you originally invested. 

Read more on Cash ISAs vs Stocks and shares ISAs

Want to see how much you could grow your savings in a Stocks and shares ISA?

Use our ISA calculator tool to get a projection. 

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More about ISAs

From tips to boost your ISA savings, to understanding which ISA account is best for you, read more about these tax-free accounts.

Open an ISA

Invest up to £20,000 tax free each year with our most popular ISA account. Get started by investing as little as £25 per month.

Transfer an account

Thinking of moving an ISA over to us? It’s easy. We'll just need a few details of your current provider, then we’ll do the rest.