You may know that a cash ISA is a tax-free savings account but did you know that this affords it a major advantage compared to normal savings accounts?
This article explains those key advantages and how you can make use of a cash ISA to enjoy grow your savings faster.
Advantages of Cash ISAs
The first advantage concerns the rate of interest.
If you shop around, you can usually find that the rate of interest offered to you by a bank or building society for their cash ISA account is slightly higher than it is for their normal savings account.
That in itself is a good reason to take out a cash ISA if you don’t have an ISA already.
However, it’s not the biggest advantage.
Tax Free Savings
Another advantage of a cash ISA and the reason why the UK Government restricts the amount of cash you can save in a cash ISA each year is that they provide tax-free savings.
If you are a UK taxpayer, then you do not pay any income tax on the interest that you earn on your cash held inside your cash ISA.
Not only does this have the obvious advantage of reducing your tax bill but it also means that your savings will grow faster because they will compound at a higher percentage rate.
This is the main advantage of a cash ISA but it is not something that I see mentioned very often, if at all.
Compound interest is a subject all of its own so I’m not going to explain compound interest here.
However, if you’d like to learn more about it, then see this article where I explain the subject in more detail.
Cash ISA Restrictions
Because of this tax-free aspect, it means that you need to leave your cash inside the cash ISA “wrapper” to retain the tax-free status of your money.
Once you withdraw cash from your ISA, the cash that you take out loses its tax-free status from that point on (any cash left inside the ISA is unaffected) and putting it back into the cash ISA again constitutes a new ISA contribution and counts towards your cash ISA limit / allowance for that year.
See this article for more about the annual cash ISA limits / cash ISA allowances.
So if you want to save cash into a cash ISA, you should think of it as cash that you won’t need anytime soon and that you are putting away for a “rainy day.”
How To Invest In Shares IN An ISA
At How To Invest In Shares, we are big fans of anything that enables taxes of any kind to be avoided legally.
Personally, I hold as many of my savings and investments in tax-efficient vehicles as possible and the ISA is one of these vehicles that I use.
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…