Cash ISA

What is a Cash ISA?

ISA stands for Individual Savings Account. These were introduced on the 6th April 1999. At that time the Government promised that ISAs would available for at least 10 years. Cash ISAs are one of the two components of an Individual Savings Account and are designed to encourage savings.

Whilst your money is held in a Cash ISA none of the interest added to your account is subject to tax. This means you can keep any money you earn from your investment without having to pay tax on any gains made.

This is different to investments, such as ordinary bank or building society accounts. Under these accounts tax is normally deducted from any interest before it is added to your account.

(Please note: there are special rules for people that do not pay Income Tax and choose to save or invest in Bank / Building Society accounts. Your financial adviser will be able to explain these rules).

Who can have a Cash ISA plan?

There are certain rules regarding the eligibility for an ISA plan and these carry across to Cash ISAs.

In order to make a contribution to an ISA plan you must be a UK tax resident (or perhaps a Crown Employee that is serving overseas)

In addition to this there are age limits:

You must be aged 16 or over before you are allowed to open a Cash ISA account. Once the account is open you are limited to making deposits of no more than £3,000 in any tax year. If you are aged less than 18 then the plan can only be a Cash Mini ISA. Once you are 18 you can invest in either a Cash Mini ISA or into the cash component of a Maxi ISA.

If you have any queries about your eligibility for an ISA you should contact your financial adviser.

Why would I want a Cash ISA?

ISAs are an excellent way for taxpayers to save. Not only is any interest added to your account without any deduction for tax but also you can have access to your money whenever you like. You do not even have to tell your Tax Office that you have any type of ISA.

How much can I invest in a Cash ISA?

Under current rules you can invest, during the tax year, up to a total of £3,000 into a Cash ISA whether that is a separate Mini ISA or the cash component of a Maxi ISA. The tax year runs from 6th April to the following 5th April.

What are Maxi and Mini ISAs?

Not only are there two different components of an ISA plan (Cash and Stocks and Shares) but there are also two different versions of an ISA. These are known as Maxi and Mini ISAs. You must always establish which version of an ISA that you are contributing to when you first start a plan, as this may affect the amount you can invest in the future.

During any tax year you can invest in a single ISA plan or you may spread your money across a number of Mini ISAs (the maximum number is three per tax year). Whether or not you have more than one version of an ISA; the overall annual investment limit will remain the same at £7,000 for the current tax year.

It is common for the Cash ISAs offered by Banks or Building Societies to be established as Mini ISAs. Bear this in mind if you are intending to make a full £7,000 subscription during the tax year. This is because the rules do not allow you to subscribe to both a Mini ISA and a Maxi ISA during the same tax year. Many of the Stock and Shares ISAs marketed by the Investment Groups are only available as Maxi ISAs.

How many ISAs can I have?

Although over time you could end up with many different ISA plans, you may only contribute (subscribe), during any single tax year, to either one Maxi ISA or up to three Mini ISAs - one for each type of the three ISA components.

Each tax year you may choose to contribute to an ISA product (either Maxi or Mini) from a different ISA provider to those you have contributed to before.

In addition to the contributions you make to a standard ISA plan, you will also be allowed to invest money into a TESSA-only ISA, however these plans may only receive money from maturing TESSA plans. The maximum that can be invested into a TESSA-only ISA is the £9,000 capital limit or the original capital you invested into your TESSA if this amount is lower.

What are the tax benefits of a Cash ISA?

Under current legislation ISAs have considerable tax incentives over other forms of investments or savings

  • Interest will be added to your account without the deduction of any tax
  • If you withdraw this interest to spend as income, then you have no liability to income tax on the money you receive from your ISA investment
  • You may withdraw your money at any time without losing any of the tax advantages
  • There is no requirement for you to declare interest that is added to your ISA plan to the Inland Revenue. You do not even need to mention that you have an ISA on your Tax Return.

How long must I keep my Cash ISA plan?

One of the major attractions of all ISA plans is that they offer you excellent access to your money. You can withdraw your money at any time without losing any of the tax relief that has been granted to your plan.

Some ISA plans may run for a fixed period or require you to give notice of withdrawal. With these particular plans you could lose some interest or bonuses should you elect to withdraw your money early. You should always read the terms of your ISA plan carefully and pay particular attention to any conditions applying to withdrawing of your money.

What are Stakeholder ISAs?

The term CAT stands for Charges - Access - Terms

On the introduction of ISAs in 1999, the Government laid down a set of standards for ISA products. These standards are designed to help savers/investors find an ISA that offers reasonable Charges, easy Access to the money invested and fair product Terms. The advantage to you of finding a product that complies with the CAT standards is that you can be certain the product terms will not suddenly change for the worse after you have invested in the product.

The brochure or other product information you receive from the ISA provider will make it clear whether or not the product complies with the CAT standards.

What are Stakeholder conditions?

Cash ISAs - Stakeholder deposit account

  • There are no charges to pay on stakeholder cash ISAs
  • The minimum deposit cannot be higher than £10
  • You can pay into the account in any of the following ways: cash, cheque, direct debit, standing order, direct credit (also called BACS or automated transfer)
  • You can make unlimited withdrawals
  • Withdrawals should be paid to you within seven days or less
  • The interest rate paid must be no less than 1 per cent below the Bank of England base rate
  • If the Bank of England rate goes up, the minimum interest rate must also go up within one month

Stocks and shares ISAs - Stakeholder medium-term investment products (MTIP)

  • Annual charge limited to 1.5% of the fund during the first ten years and 1% thereafter.
  • The minimum deposit cannot be higher than £20.
  • No more than 60 per cent of the fund is invested in riskier assets such as shares
  • You can pay into the account in any of the following ways: cheque, direct debit, standing order, direct credit (also called BACS or automated transfer).
  • The prices at which units or shares in the fund are bought and sold must be the same and the price should be published daily

Extra terms apply to the smoothed MTIP:

  • Some of the return in good years is paid into a ‘smoothing account’ to be used to top up the return in bad years
  • If the smoothing account needs extra capital, policyholders can be charged extr
  • Managers must make available information about their policies on smoothing and charging
  • The whole with-profits fund and the whole smoothing account, apart from specific deductions allowed by law, are for the benefit of policyholders.

What happens if I die?

Any ISA plans you hold will end on the date of your death. No tax will be due on any interest added to the ISA up to that date. However, if the plan continues after your death, then your personal representatives will be liable for taxation on any subsequent interest added.

The value of any ISA plans will be added to the rest of your assets when calculating the value of your estate for Inheritance Tax purposes.

Should you wish to include new investment or savings opportunities that are not provided from your current ISA manager then you may have to transfer your money to another manager.

I have a TESSA investment plan, may I transfer it to a Cash ISA?

Tax-exempt special savings accounts (TESSAs) are no longer available, and the last TESSAs matured on 5 April 2004. You had six months from the date your TESSA matured (in other words up to 5 October 2004 in the case of the very last TESSAs) within which to transfer the capital (but not the interest) to a tax-free ISA.