A cash ISA is very similar to a normal savings account with the major exception that a saver will not pay tax on the interest earned. UK residents aged 16 and over are eligible to open a cash ISA.
The tax-efficiency of a cash ISA can be highlighted with the following example:
A basic-rate taxpayer pays £10,000 into regular easy access savings account that pays interest at 1.3%. Interest on the account would equate to £130 per year, but the application of a 20% savings tax reduces the net interest received to £104.
However, if a cash ISA was opened with the same interest rate, the saver would receive the full £130 per year. Higher rate tax payers also benefit from larger savings.
The ISA allowance for the 2016/2017 financial year is £15,240. This allowance can be put all into a cash ISA, all into a stocks & shares ISA or a mixture of both in any proportion at an individuals discretion.
Cash ISAs can be opened at most banks and building societies. There are a few different types of cash ISAs, but the main two are: easy access with a variable rate of interest and fixed rate which tend to pay a higher rate of interest than the former but have penalties for early withdrawal of cash.
Like stocks & shares ISAs, savers can only pay into one cash ISA per financial year and can open a new cash ISA every new financial year.