What is a Cash ISA?

How does a Cash ISA work? 

A Cash ISA operates much like a standard savings account, but with a key difference: the tax treatment. Interest earned in a Cash ISA doesn’t use up your PSA and remains tax-free whatever your income level. This is particularly relevant if your interest is likely to exceed your PSA or if you pay higher-rate or additional-rate tax. 

Who can open a Cash ISA? 

To open a Cash ISA you must be a UK resident aged 18 or over and have a valid National Insurance number. Each tax year, you can subscribe up to the ISA allowance across all your ISA accounts combined (i.e. Cash ISA. Lifetime ISA, Stocks and Shares ISA), and it’s your responsibility to stay within the annual limit. 

How do you access your money? 

Access depends entirely on the type of Cash ISA you choose. Some allow penalty-free withdrawals at any time; others require notice or lock your money away for a fixed term. These rules vary widely by provider, so it’s worth checking how easily you might want to access your savings before opening an account. 

What are the different types of Cash ISA? 

Cash ISAs come in four main forms: Instant Access, Fixed Rate, Regular Saver, and Flexible ISAs. Each offers different rules around deposits, withdrawals, and interest calculations. Those rules determine both your potential returns and the level of flexibility you have. 

Instant Access Cash ISA 

An Instant Access Cash ISA allows you to deposit and withdraw money whenever you need to, without any penalties or restrictions. The interest rate on these accounts is usually variable, which means the provider can adjust the rate at any time, often with short notice. This level of flexibility makes Instant Access ISAs one of the most straightforward ways to earn tax-free interest on your savings.  

Who Instant Access Cash ISAs are suitable for 

Instant Access Cash ISAs are best for savers who want to keep their money accessible while still benefitting from the ISA tax advantages. This might include people building an emergency fund, or those saving for short-term goals where liquidity is important. They can also be useful for holding cash temporarily before deciding on a longer-term savings strategy. 

Fixed-Rate Cash ISA 

A Fixed Rate Cash ISA requires you to commit your savings for a set period, typically between one and five years, in exchange for a guaranteed interest rate. Because you are locking your money away for an agreed term, providers generally offer higher rates than you would find with an instant access account. This can make fixed-rate ISAs appealing during periods when rates are stable or expected to fall. 

The key consideration with fixed-rate accounts is that early withdrawals usually result in penalties, which may include losing several months of interest or, in some cases, closing the account entirely. This means Fixed Rate Cash ISAs are best suited to people who are confident they will not need access to their savings during the fixed term. 

Who Fixed Rate Cash ISAs are suitable for 

Fixed Rate Cash ISAs tend to suit savers with medium to long-term goals, such as saving for a future home purchase, a major expense, or simply wanting certainty over the interest they will earn. They offer stability and predictable returns, but that reliability comes with reduced flexibility. 

Regular Saver Cash ISA 

A Regular Saver Cash ISA allows you to deposit smaller amounts each month, typically within a defined limit set by the provider. These accounts can offer attractive introductory interest rates for the first 12 months, but they place restrictions on how much you can pay in at one time. For savers who benefit from routine and structure, this type of ISA can help cultivate consistent saving habits. 

However, the monthly deposit cap means that Regular Saver ISAs are not always the most efficient vehicle for using your full ISA allowance. If you want to maximise your annual tax-free savings, you may need to combine a Regular Saver ISA with another ISA type. 

Who Regular Saver Cash ISAs are suitable for 

Regular Saver Cash ISAs work well for individuals who want to build savings discipline or who prefer to spread contributions over time. They can be useful for people starting their savings journey or those who prefer a structured monthly commitment. 

Flexible Cash ISA 

A Flexible Cash ISA allows you to withdraw money and replace it within the same tax year without affecting your annual ISA allowance. This flexibility is particularly valuable for savers who may need to move money in and out of their ISA while still wanting to preserve the tax-free status of their interest. 

Despite their advantages, Flexible Cash ISAs are not offered by every provider, and the interest rates may not always be the highest available. The rules around flexibility also apply only within the same tax year, so planning withdrawals carefully is important. 

Who Flexible Cash ISAs are suitable for 

Flexible Cash ISAs are well suited to people who anticipate fluctuations in their cash flow but still want to maintain their full ISA allowance. They offer the ability to manage short-term financial needs while keeping the long-term tax benefits of the ISA wrapper intact. 

How much can you put into a Cash ISA? 

For the 2025/26 tax year, the total ISA allowance is £20,000, the same as the previous year. You can divide this allowance across different Cash ISA types.  

However, from 6 April 2027, the amount you can put into a Cash ISA will be capped at £12,000 a year for savers under 65. The overall ISA allowance stays at £20,000, and people aged 65 and over can still put the full £20,000 into cash if they wish.

Can you open multiple Cash ISAs? 

Yes. You can open and pay into multiple Cash ISAs in the same tax year, provided your total contributions across all ISAs stay within the £20,000 limit. Some savers use this flexibility to combine fixed-rate products with instant-access options, balancing higher returns with access to cash if needed.  

What happens if you exceed your allowance? 

The responsibility for staying within the allowance rules ultimately falls on the account holder. If you go over the allowance HMRC will normally require the excess to be removed.  

Can you transfer money from an old Cash ISA? 

Yes - you can transfer money from an existing ISA to a new provider without this counting towards your current-year allowance. This is particularly useful when switching to a better interest rate or different account type.  

However, Cash ISA transfers should always be arranged by the new provider. If you withdraw the funds yourself instead of using the official transfer process, your ISA status is lost and the savings will count as fresh contributions if you try to pay them back in, which may reduce your available allowance for the year. 

What interest rates do Cash ISAs pay? 

Cash ISA rates vary widely by provider, product type, and market conditions. As with standard savings accounts, they can be variable or fixed. 

How do Cash ISA rates work? 

Cash ISA rates generally fall into two categories: variable rates that can change at the provider’s discretion, and fixed rates that remain constant for the duration of a specified term.  

Variable-rate ISAs offer greater flexibility but may see their rates adjusted up or down as market conditions shift. Fixed-rate ISAs, by contrast, guarantee a set rate of interest for a defined period, often between one and five years, but require you to commit your savings for that term. 

Note: Some providers offer introductory or bonus rates that apply for a limited period before reverting to a lower ongoing rate. It’s important to understand when these bonus periods expire, as your returns may be lower once the introductory rate ends.  

Why can Cash ISA rates be lower than standard accounts? 

Cash ISA rates are sometimes lower than those available on equivalent standard savings products. This is largely because the tax-free status of a Cash ISA adds value for savers, meaning providers may not need to offer as high a headline rate to attract deposits.  

How often is interest paid in a Cash ISA?  

Interest on Cash ISAs may be paid monthly or annually, depending on the account. Monthly interest can help savings compound more frequently, while annual interest may offer slightly higher headline rates in some cases.  

The payment frequency does not affect the tax treatment, all interest earned remains tax-free, but it may influence how quickly your balance grows or how predictably you can monitor your savings. 

Comparing interest rates between Cash ISA providers 

Interest rates vary across traditional banks, digital-first providers, and building societies. Newer or challenger banks often lead the market with competitive rates, reflecting their lower overheads and desire to attract new customers. Traditional high street banks may offer lower rates but appeal to savers through established reputations and existing customer relationships. 

Cash ISA vs other savings and investment options 

Are Cash ISAs worth it? 

Whether a Cash ISA is worth it depends on your tax position, the amount you are saving, and how important flexibility and interest rates are to you.  

For savers focused on low-risk, predictable growth, Cash ISAs also offer a simple way to build tax-efficient savings over time without exposing their money to market volatility. However, the benefits vary depending on individual circumstances, and in some cases other savings options may provide a higher return. 

How to open a Cash ISA 

To open a new adult Cash ISA you must be a UK resident aged 18 or over and have a valid National Insurance number. It is a straightforward process, and most providers allow you to do it online, through a mobile app, or in branch. 

Once the account is open, you can fund your ISA with a lump sum, regular deposits, or transfers from an existing ISA. If you are moving money from another provider, using the ISA transfer process is essential to ensure your savings keep their tax-free status. 

How to transfer a Cash ISA 

You can transfer a Cash ISA to a new provider at any time, and doing so is often the best way to secure a more competitive interest rate. To keep your savings within the ISA tax wrapper, the transfer must be completed through the new provider’s official ISA transfer process rather than by withdrawing the funds yourself. 

Most transfers take around 7 to 15 days, although fixed-rate ISAs may require you to wait until the end of the term to avoid penalties. 

What are the risks of a Cash ISA? 

While Cash ISAs are low-risk savings accounts, there are a few considerations to keep in mind.  

• Inflation risk: if the interest you earn is lower than the rate at which prices rise, the real value of your savings may fall over time. This is a common issue for all cash-based products, not just ISAs. 

• Withdrawal penalties: Fixed-rate Cash ISAs can also carry withdrawal penalties if you need access to your money before the term ends. These charges vary by provider and may reduce or even eliminate the interest you’ve earned. 

• Low Returns: Returns on Cash ISAs tend to be lower than those available from investment products. For savers focused on longer-term growth, a Stocks & Shares ISA may offer greater potential, although it comes with investment risk that a Cash ISA avoids. Research shows that the average return on stocks and shares ISAs has been 9.64% annually, compared to 1.21% for lower-risk cash ISAs over the last 10 years. 

What protection do Cash ISAs have? 

Cash ISAs benefit from the same protections that apply to most UK-regulated savings accounts.  

• FSCS protection: Cash ISAs with UK-authorised banks, building societies and credit unions are covered by the Financial Services Compensation Scheme (FSCS). If your provider were to fail, FSCS can compensate you up to £120,000 per person, per authorised firm for firm failures from 1 December 2025 (previously £85,000) 

• Financial Conduct Authority (FCA): Cash ISAs must be held with UK-recognised providers such as banks, building societies, credit unions or NS&I. These firms are subject to UK financial regulation (for example, FCA and PRA rules), and NS&I products are additionally backed by HM Treasury 

What happens to my money if a Cash ISA provider fails? 

If an ISA provider does fail, the FSCS will compensate eligible savers or arrange for accounts to be transferred to another provider. The tax-free status of your savings is preserved throughout the process.