Cash Isas: FAQs
Isas offer much more competitive savings rates
What's a cash Isa?
A cash Isa is essentially the same as a normal savings account; the difference is that the interest from a cash Isa is tax free.
Are there limits on how much I can invest?
Because of the tax advantages of an Isa, the government sets limits on how much you can invest in a given tax year. In the current tax year (2008-2009) the maximum you can invest overall is £7,200. Up to £3,600 of this limit can be invested into cash, with the balance being invested into stocks and shares. Alternatively, you can put the whole £7,200 into a stocks and shares Isa.
If I withdraw any money, can I put it back in the account later?
You can provided you don't go over the limit for the year. The limits apply to the money paid into the account, not the account balance. For example, if you pay £1,000 into your cash Isa on 30 April 2008 and then withdraw it in June, you can still pay in a further £2,600 up to 5 April 2009.
However, if you paid in the full £3,600 on 30 April 2008 and withdrew £1,000 in June you are still classed as having paid in the full amount for the current tax year, so you can't put pay in any more until the new tax year.
What happens at the end of the present tax year?
You can withdraw as much cash as you like, but you can only put £3,600 in annually
Each 5 April you get a new limit, regardless of the present balance in your account. So if you already had £4,000 saved in your cash Isa, from 6 April 2008 you could pay another £3,600 in bringing your total up to £7,600. Equally, any interest earned on the balance can remain in your Isa.
The yearly limit is on the money you pay in during the tax year. So if your balance from previous tax years was already £4,000 you could withdraw £1,000 of this in May, but in June still pay in your full £3,600 bringing the new balance to £6,600.
Are there are other types of Isa?
Yes, as well as cash Isas you can also invest in stocks and shares Isas.
You can choose to put your whole Isa allowance (currently £7,200) into a stocks and shares Isa if you wish.
Alternatively you can currently put up to £3,600 into cash, with the balance of up to a further £3,600 into stocks and shares.
Stocks and shares Isas aren't completely tax-free like cash Isas. Dividends paid on stocks and shares Isas have tax of 10% deducted, which can't be reclaimed.
I opened a cash Isa in 2003 but I'm unhappy with the interest rate. Can I transfer it even though I've used this year's ISA allowance elsewhere?
Yes. You can transfer all or part of previous years' Isas to any other provider which accepts transfers, without affecting the current tax year's Isa allowance. However if you want to switch your current year's Isa as well, you must switch all the money you've paid in since 6 April.
If you do transfer, don't just withdraw your cash Isa money from your existing provider, otherwise you'll lose your tax relief. You should arrange for your new and old Isa providers to carry out the transfer between them.
Previously you could only transfer cash Isas to other cash Isas or stocks and shares Isas to other stocks and shares Isas. However, from 6 April this year you can now transfer cash Isa money to stocks and shares Isas - but not the other way around.
I opened a cash Isa this tax year but took the money out and paid it into a higher-paying Isa. Will I still get tax relief on the new Isa?
If you do it yourself by withdrawing money from the old Isa and opening a new one, the new Isa may not to be valid. This is because you can't pay into more than one cash Isa in a tax year.
However, since 8 January 2003, it has been possible to 'repair' the invalid Isa and, for Isas opened from 6 April 2003 onwards, the rules have changed so that in the situation you describe the new Isa will not be declared invalid at all.
Anyone over the age of 16 can open a cash Isa
You can only do this once though – do the transfer yourself a second time, and it won’t be possible to repair the second Isa and it will lose its tax-free status.
My daughter’s just turned 16. Can she invest in an Isa?
It depends on the type of Isa. Your daughter can invest in a cash Isa, but she can’t take out a stocks and shares Isa until she's 18.
We’ve heard that some banks and building societies are saying that legally you have to be 18 to take out a cash Isa. This is wrong – the minimum age is 16, though providers can choose to impose a higher minimum age.
When my Tessa matured, I moved £9,000 into a Tessa-only Isa. Can I switch it to a cash Isa?
Yes. The usual Isa switching rules apply – the transfer has to be made between providers. If you just withdraw the money from your old account and take it to your new provider, it will be treated as a new investment and count against your current year’s Isa limits.
The rules allow you to transfer your cash Isas and Tessa-only Isas but be aware that not all cash Isa providers accept transfers.
For how long will my Isa remain tax free?
Originally the government said Isas will continue until April 2010. However, it has now confirmed that Isas will remain indefinitely.