Cash ISAs Explained: Are They Worth It?
A Cash ISA is a type of savings account where you do not pay any tax on the interest you earn. It is one of the most popular types of ISA because it is simple, low risk, and easy to open.
How a Cash ISA Works
Cash ISAs work much like normal savings accounts, but the interest is always tax free, regardless of how much you earn. You can deposit up to your annual ISA allowance into one each tax year. All interest stays tax free year after year as long as the money remains in the ISA.
2025/26 ISA Allowance
You can save up to £20,000 in ISAs during the 2025/26 tax year. That total can be spread across different ISA types, but you can only pay into one Cash ISA per year. Transfers from previous years do not count towards the current year's allowance.
Types of Cash ISAs
- Easy Access: Withdraw your money anytime, but interest rates may be lower.
- Fixed Rate: Lock your money away for a set time (for example 1 to 5 years) in exchange for a higher interest rate.
- Regular Saver: Some providers offer monthly deposit limits with fixed terms and rates.
- Flexible ISA: Withdraw and replace funds within the same tax year without affecting your allowance (check with the provider).
Cash ISA vs Normal Savings Account
Cash ISAs used to be the go-to savings option, but things have changed:
- Most people now get a Personal Savings Allowance (£1,000 for basic rate taxpayers, £500 for higher rate), meaning many do not pay tax on savings interest anyway.
- Regular savings accounts often offer higher interest rates than Cash ISAs.
| Cash ISA | Normal savings account |
|---|---|
| Interest always tax free | Interest may be taxable if you exceed your Personal Savings Allowance |
| Annual £20,000 deposit limit | No annual limit |
| May have lower rates than best savings accounts | Often higher rates available |
Worked Example
If you had £15,000 in a Cash ISA paying 4% interest, you would earn £600 interest in a year. All of that interest is tax free. If the same money was in a normal savings account and you had already used up your Personal Savings Allowance, you could pay 20% or 40% tax on that £600.
Who Can Open a Cash ISA?
You must be:
- A UK resident for tax purposes
- Aged 16 or over
Can You Switch Providers?
Yes, you can transfer your Cash ISA to another provider for a better interest rate. Always request a formal ISA transfer rather than withdrawing the money yourself. If you withdraw and redeposit without using the proper process, you will lose the tax free status on that amount for the current year.
When a Cash ISA Makes Sense
A Cash ISA may be a good option if:
- You are likely to exceed your Personal Savings Allowance
- You want a tax free home for long term savings
- You are risk averse and prefer guaranteed returns
If you are unsure which ISA is right for your goals, take our quick ISA quiz to find the best fit.
Common Mistakes With Cash ISAs
- Chasing a high fixed rate without checking early withdrawal penalties
- Forgetting to move your ISA when the rate drops
- Not using your full allowance even when you have spare savings
Explore Other ISA Options
If you are considering alternatives to Cash ISAs, check out our other ISA guides:
- Stocks & Shares ISA – invest in the markets with no capital gains or dividend tax
- Lifetime ISA – save for your first home or retirement with a 25% bonus
- Innovative Finance ISA – peer to peer lending with higher risk and potential return
- Junior ISA – save tax free for a child under 18