It was announced in the Chancellor's March Budget that several changes will come into effect regarding Cash ISAs and how they can be used by savers. But what exactly is a Cash ISA, how will they change when the new tax year starts on April 6 and how can consumers get the most out of them?
To help Brits navigate the different options ahead of changes in the new tax year (2024/25), Defaqto, one of the UK’s most trusted sources of financial product and market intelligence, explains everything consumers need to know about the new Cash ISA rules.
What is a Cash ISA and why should consumers consider using one?
Katie Brain, consumer banking expert at Defaqto, said: “A Cash ISA is a type of savings account which offers tax benefits to savers. Consumers can deposit money into a Cash ISA, receiving tax-free interest up to £20,000 each tax year. If you’re a basic-rate taxpayer with more than £19,820 in savings or a higher-rate taxpayer with more than £9,920 in savings, there are several changes to Cash ISAs that could help you make the most of your savings this year.”
As a basic-rate taxpayer, the personal savings allowance could be exceeded on a deposit of £8,000 if your fixed-rate savings account pays compound interest at maturity. For example, based on the best three-year fixed rate at 4.69% (as of April 2, rates may change), with a deposit of £8,000 the annual interest per year would be £375.20. But if the interest is left to compound it would be £1,179.22, which would take you over the £1,000 personal savings allowance. This is where leveraging a Cash ISA or alternative ISA product could help.
Alongside a standard Cash ISA, there are several other types of ISA available including;
- Lifetime ISA: Also known as a “LISA”, this type of account is designed for first-time buyers and can also be used for retirement, allowing savings of up to £4,000 each tax year which the government then tops up by 25%. Maximum age is 40 years old.
- Junior ISA: A Junior ISA or JISA can be opened on behalf of a child by a parent or guardian. There is an allowance of up to £9,000 per year which anybody can contribute to. For example, grandparents and extended family.
- Stocks and Shares ISA: This is sometimes known as an investment ISA and allows money to be put into a range of investment products, with tax-free interest earned.
- Innovative Finance ISA: this is a type of savings account which allows customers to invest in peer-to-peer lending or crowdfunding schemes, whilst taking advantage of an ISA’s tax-free allowance. This means any growth is not subject to taxes like capital gains or income tax.
How will Cash ISAs change from April 6?
April marks the 25th anniversary of the Cash ISA and the popular savings accounts have come a long way in that time. Back in 1999, the allowance was only £7,000 compared to £20,000 today, which benefits those wishing to deposit larger sums annually.
ISAs are also set to change again following last month’s budget announcement. Upcoming changes to Cash ISAs from April 6 include:
The ability to open multiple ISAs of the same type within the same tax year
Katie said: “The biggest change is that people will be able to open multiple ISAs of the same type. At the moment you can only open one per tax year. However, this isn’t mandatory so providers could choose to limit subscriptions to only one ISA in any tax year should they see fit.
"An example of how this could be used would be if a person put £5,000 in an instant access ISA as a rainy-day fund, £10,000 in a 1 Year Fixed Rate ISA, and £5,000 in a 2 Year Fixed Rate ISA. This would mean savers can take advantage of the best interest rates for different levels of access required.”
Fixed-rate ISAs may allow additional deposits during the term
Katie added: “A few providers will even allow you to make additional deposits during the term of a Fixed-rate ISA. So, if you want to hedge your bets with interest rates likely to drop (especially on Fixed-rate ISAs), then you could open different terms of ISA in the new tax year with the option to add to them if permitted.”
Age limits will change for adult ISAs
Discussing changes affecting 16 and 17 year olds, Katie said: “The minimum age for an adult ISA will be raised from 16 to 18. Children aged 16 and 17 can continue to pay into a Junior ISA but this has a lower tax allowance of £9,000 per tax year rather than £20,000.”
Partial transfers from existing ISAs will be allowed
Katie said: “You will be able to transfer part of an existing ISA balance from one ISA provider to the other. For example, if you want to take advantage of a better rate elsewhere but want to keep some of the balance in the existing ISA you will be able to.”
Katie’sfourtop tips when considering whether a Cash ISA is right for you:
- Check your personal savings allowances - Think about whether you will encroach on your Personal Savings Allowance, £1,000 in interest for most people and £500 for higher-rate taxpayers. Because if not, then standard savings rates may be better than cash ISA rates so take advantage of those first if you have lower amounts to deposit.
- Compare rates and ISA types to receive the biggest returns - Using a Cash ISA alongside other types of ISA might allow you to make more tax-free savings. Compare options for the best split based on limitations of each account type and the rates available across different providers too.
- Consider how much and when you intend to deposit into the account - The sooner in the tax year you can deposit cash into your ISA, the sooner you will start building tax-free interest on any savings, making the most of your annual allowance.
- Think about the type of access you might need - Some types of ISA require you to leave your savings untouched for a set period. If you are unsure or think you might be likely to need to access the cash before the agreed time, you might want to consider a different ISA with instant access or shorter time frames.
