60 second guide to managing your cash IsaWhich? helps you find the best cash Isa

24 October 2011

Cash isa guide

You'll be able to put £5,640 tax-free into cash Isas from April 2012

The news that the cash Isa limit will rise to £5,640 in April 2012 should be your prompt to make sure you're getting the best rate on your tax-free savings.

Inflation reaching 5.2% in September 2011 is good news at least for people putting money into cash Isas. With the Isa limit increase linked to the Consumer Prices Index you'll be able to put up to £11,280 overall into Isas from April 2012 and up to £5,640 into cash Isas.

Which? gives you advice on managing your Isa, or Isas, and how to switch if you want to access a Which? Best Rate Isa.

Finding the best cash Isa

There are hundreds of cash Isas out there promising to pay the best interest rates, but these rarely ever last. Switching your savings into a Best Rate Isa every year could earn you considerably more cash than you'd earn by leaving your money languishing in an account that used to pay you a decent rate of interest.

You can also check out our Best Rate one year fixed-rate cash Isas and Best Rate easy-access cash Isa tables to see the best rates currently available on the market. We understand that sometimes you'd rather not have to keep switching your cash Isa, so our Best Rate tables also show the Isas that have offered their customers consistently good savings rates over the past three years.

How to transfer an Isa

Transferring an Isa allowance is more complicated than switching a standard savings account. One key piece of advice to outline from the outset is that you should not withdraw money from a cash Isa with the intention of transferring the money to another account. Doing this will mean you'll lose your tax benefits.

Once you chosen your new company you'll need to fill out an Isa transfer form. A note will be sent to your current Isa provider and the new company will move the move your money over. Banks have agreed to adhere to guidelines that see the transfer take place within 15 working days.

What about money I've paid in this year?

Even if you have already paid into an Isa this tax year, you can still transfer previous years' savings into different accounts. If you wish to (and provided you have not paid into a fixed-rate cash Isa), you can even transfer all of your savings - including the money you have put into this year's cash Isa - to a new provider.

However, if you're thinking of putting your Isa savings from this year into an account that also houses money from previous years, be sure to check whether you'd be better off by keeping your cash separate. Isas that allow transfers in often pay lower interest rates than those that don't.

What happens if I get the rules mixed up?

Because the 'self-transfer' of Isas isn't allowed, by withdrawing and moving your money yourself you may have forfeited its tax-free status.

However, if you closed your first Isa, withdrew your savings from the current tax year and then transferred them to a second cash Isa, it is likely that this second Isa would be declared valid by HM Revenue & Customs (HMRC). If you were to make the same mistake again by opening a third Isa, though, this would be declared invalid for tax purposes.

What happens if I withdraw money?

If you take money out of your account, it's possible for you to replace that cash later in the tax year - but only if you have not already invested the maximum sum allowed in your Isa.

Your annual cash Isa limit of £5,640 (from April 2012) applies to the money that is paid into your account, rather than your Isa balance. For example: if you paid £1,000 into your cash Isa on 30 April 2012 and then withdrew it in June, you would only be able to pay in £4,640 to your account between then and April 5 2013.

Each 6 April you get a fresh annual allowance (£5,640 in April 2012), regardless of the present balance in your account. If you haven't used your full Isa allowance from the previous tax year, however, this will not be carried over.

More on this...

  • Which? Best Rate cash Isas - choose from all of our cash Isa tables
  • Which? Best Rate instant access cash Isas - tax-free savings if you need to get your hands on the money in a hurry
  • Which? Best Rate 1-year fixed cash Isas - the best rates if you're happy to tie your cash up for a year