ISA Explained: The Cash ISA And Savings Accounts

You may know that a cash ISA is a kind of savings account but did you know that they do not work in the same way as normal savings accounts?

This article explains the differences and how you can make use of a cash ISA if you are not doing so already.

How Does A Normal Savings Account Work?

Most bank or building society accounts are what can be described as normal savings accounts.

In very simple terms, you put cash into them and you get interest in return.

If your account is an instant-access account (the simplest kind) then you can take some or all of your money out of your account any time you like.

If you change your mind, you can put the same money back in again.

Then take it out again later and so on.

Normally, there are no restrictions of any kind on an account such as this in terms of the amount you can put into it or when you can take it out, etc.

However, the returns you can get on instant-access savings accounts are usually very low.

Not only that, but if you are a taxpayer, you pay income tax at your highest rate on any interest that you get from your savings account.

Now let’s look at cash ISAs…

What Is A Cash ISA?

A cash ISA is a kind of savings account and most banks and building societies market and advertise them as if they were the same thing.

However, there are some fundamental differences.

Each tax year, the UK Government restricts the amount of new cash that you can save into your cash ISA.

This amount is known as the cash ISA limit or cash ISA allowance for a given tax year.

To see the cash ISA limits / cash ISA allowances from 1999 to present, click here.

As the UK tax year runs from 6th April to 5th April each year, this means that you have a separate allowance each and every year which you can put into your cash ISA between those two dates.

You are only allowed one cash ISA each tax year with one cash ISA provider but you can have a different cash ISA provider each year for that year’s allowance if you wish.

On the face of it then, having a cash ISA instead of a normal savings account would seem like a bad idea.

However, cash ISAs have three BIG advantages over normal savings accounts.

If you want to know what they are, read this article!

How To Invest In Shares

If you’d like to know more about how to use ISAs with your savings and investments, then why not access a copy of this free ISA guide from Hargreaves Lansdown?

Alternatively, If you have any questions or comments about cash ISAs, cash ISA limits / allowances, etc. then please leave them below and I will answer…

Disclosure: The author of this blog post is a customer and affiliate of Hargreaves Lansdown

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