A Cash ISA is an Individual Savings Account that earns interest in the way that a normal savings account would, as a percentage of the cash amount held in the account, however it has the benefit that the interest earned is tax free^.

Cash ISAs were designed by UK Government and allow you to save a set amount, where interest earned is tax free^ in each financial year. For the current tax year (2023/24), the maximum amount you can save is £20,000.

This approach also means that the interest earned on your savings, if it is paid annually, is paid at the end of the financial year on 5 April rather than the end of the calendar year.

You can have more than one Cash ISA, however you can only pay into one Cash ISA in any tax year. If you already have an ISA account, then you may be able to transfer it to a new provider, depending on the terms and conditions with the new provider. The maximum £20,000 investment amount remains the same, regardless of whether you switch providers.

No, you can only put in up to £20,000 in your Cash ISA in the 2023/24 tax year. This subscription limit is set by the UK Government.

The main advantage of Cash ISAs is that the interest earned is tax free^. A Cash ISA also offers a percentage return on the amount saved in the account and, unlike Stocks and Shares ISAs, are not linked to the performance of the stock market.

Another advantage is that you can either save regularly or deposit a lump sum in one go as long as you don’t exceed your maximum £20,000 annual ISA allowance.

Cash ISAs with UK authorised banks, building societies and credit unions are also protected under the Financial Services Compensation Scheme (FSCS). The scheme protects up to £85,000 of your savings in case your bank or building society fails.

Disadvantages of Cash ISAs are:

• the maximum amount that you can save in a tax year, set by the UK Government
• you can only pay into one Cash ISA in any tax

The Government’s Personal Savings Allowance allows basic rate taxpayers to earn up to £1,000 in tax-free savings each year from any type of savings account. For higher rate tax payers, up to £500 can be earned tax free. This means that, although interest earned on an ISA is tax free^, you may also be able to earn interest from a different type of account with a better interest rate without tax being applied.

For example, if you are a basic rate tax payer, £20,000 saved in a different type of account to an ISA would have to earn over 5% interest before tax was applied. As a result, you may want to check alternatives to a Cash ISA depending upon the amount you have to invest and the interest rates on offer.

Subject to product availability, there are different types of Cash ISAs to choose from, including Easy Access, Fixed Rate, Notice Accounts and even Cash Junior ISAs for children under 18 years of age.

One of the best ways to choose the right Cash ISA is to think about what type of access you want from your savings. If you need instant access to your savings, then an Easy Access account might suit you best, but if you’re prepared to lock your savings away for a year or two to earn a better rate of interest, then you might want to consider a fixed rate Cash ISA.

A notice account can be a compromise between an easy access account and a fixed rate account – rather than locking your money away for long periods, you can still access your money by giving notice before you make a withdrawal. The amount of notice can vary from 30 days’ or even 180 days’ notice. The longer the notice period the more interest you may be able to earn.

There is no penalty for closing an Easy Access Cash ISA, however if you want to close a fixed rate Cash ISA or a notice account early, then a penalty will be applied to the closing balance.

The penalty applied is typically a number of days loss of interest on the closing balance. The number of days can vary from account to account and between providers, so it’s worth checking with your provider directly if you are considering closing a fixed rate or notice account early.