The first rule of ISAs

The first rule of ISAs is - you talk about ISAs!

Did you know they’ve been available to help you save for 25 years?

That’s why we’re reminiscing about the iconic 1999 film, Fight Club. It famously taught us that the first and second rule of Fight Club is “you do not talk about Fight Club.” But if we move on from that underground society and focus on saving money, we can talk about ISAs!

Have you wondered about opening an ISA and if they’re the best option for your savings? Or, if you’re getting the most out of your existing one?

You can find out which type of account could be right for you, how much you could save, who can open one and explore our common queries with our guide.

The second rule: explaining ISAs

An Individual Savings Account (ISA) is a savings account where you don’t pay tax on any interest you earn. So, if you’re currently paying tax on your savings in a standard account, an ISA could be a great way to make the most of your money.

There are many different types of ISAs, and you can choose to save your full allowance into a single account or split it between different ones.

To help you decide which one is right for you, we’ve weighed up the pros and cons of each type below:

• Easy Access. With an Easy Access Cash ISA you’re free to make deposits (up to the annual Cash ISA limit) whenever you want and make withdrawals to suit your needs. But, you can’t take money out of your Cash ISA and replace it in the same tax year without it counting towards your annual ISA allowance.
• Notice. With a Notice Cash ISA you can earn a higher rate of interest than with an easy access account and you’ll still be able to make deposits (up to the annual Cash ISA limit) whenever you want. To withdraw your money, just give the agreed amount of notice and it’ll be made available to you.
• Fixed Rate. If you don’t need access to your money, a Fixed Rate Cash ISA could be ideal for growing your tax-free savings. You’ll get a fixed rate of interest paid tax-free for a set period of time, so you can relax knowing exactly what interest your savings are earning.
• Flexible. With a Flexible ISA you’re able to withdraw and replace your savings as many times as you like, providing you don’t exceed your annual ISA allowance in each tax year. You can even withdraw funds deposited in previous tax years, as long as you replace the money you take out within the same tax year.

The third rule: ISA allowances and earning interest

Each year the Government sets out your annual ISA allowance, which is the maximum amount of money you can pay into an ISA in that tax year.

The allowance for the 2024/2025 tax year is £20,000. That means you can deposit up to £20,000 into your Cash ISA without having to pay tax on the interest you earn.

And, any interest you earn won’t count towards your Personal Savings Allowance either.

The Personal Savings Allowance lets basic rate taxpayers earn up to £1,000 in interest from current accounts, savings accounts, fixed rate bonds or any account where they earn interest. For higher rate taxpayers the allowance covers up to £500 of interest, but those classed as additional rate taxpayers aren’t entitled to a Personal Savings Allowance.

A Cash ISA doesn’t stop you from earning interest in other types of savings accounts. And if you’re already earning more interest than your allowance, transferring some of your money into a Cash ISA leaves you free to continue to grow your savings without incurring any additional tax.

The fourth rule: number of ISAs

Usually, you can only open one Cash ISA in each tax year, and you can’t pay into more than one in the same year.

However, some providers allow you to spread your annual allowance across several different types. This gives you a choice of interest rates and access options to suit your needs, rather than tying you in to a one-size-fits-all account.

For example, you could open an Easy Access Cash ISA with £5,000, which you can access easily if you need to, and deposit £10,000 into a Fixed Rate Cash ISA, which will usually earn a higher rate of interest. In exchange for the higher rate, your savings will be locked away for a fixed term.

You could then deposit the remaining £5,000 of your £20,000 allowance into a Notice Cash ISA. This would give you access to your savings, after giving the required amount of notice, as well as a higher interest rate than an easy access account.

If you’re looking to make a withdrawal, you should always check the conditions of your account.

The fifth rule: how much to pay into your ISA and when

This all depends on which type of ISA you choose. With most Easy Access and Notice Cash ISAs, you can add to your savings at any time. So, if you’ve got a lump sum to deposit that’s fine, you can pay up to the maximum allowance in one go.

Or you could instead put money away every now and again or set up a regular standing order to your account.

With a Fixed Rate ISA, the majority of accounts will only allow you to make deposits during a limited funding window when you first open your account, after which you’re not able to make additional deposits.

For all types of Cash ISAs, the first deposit will usually need to be equal to the minimum balance applicable to each account, after which any future deposits can be varied amounts depending on the amount you have available to save.

The sixth rule: transferring money from another provider

Many ISA providers will allow you to transfer money from another provider, and they can arrange the transfer on your behalf.

However, it’s very important that you check the terms of your existing account before arranging a transfer, as there may be notice periods or charges that apply. If you transfer your savings without giving the required notice, or during a fixed rate period, you may be subject to a charge by way of a loss of interest on the amount transferred.

Always check with your existing ISA provider before making a transfer, and also let your new provider arrange the transfer to avoid losing any tax benefits for the amount you withdraw.

The seventh rule: who can open an ISA?

Anyone can open a Cash ISA if they’re aged 18 and over and you haven’t subscribed to another ISA in the same tax year (unless you’re using a mix and match ISA to spread your allowance over more than one account).

You can only open an account in your own name. It’s not possible to have a joint accounts as ISAs are individual savings accounts, and you can’t open them on behalf of anybody else.

The eighth rule: how ISAs are protected

All eligible deposits in UK savings accounts, including Cash ISAs, are protected up to a total of £85,000 by the Financial Services Compensation Scheme (FSCS), the UK’s deposit protection scheme. Any savings held above this limit are unlikely to be covered.

You should always check if your provider shares its FSCS cover with another institution, as several providers could be owned by the same bank, meaning that even if you spread your savings across more than one provider you could only be protected for a total of £85,000, not £85,000 per provider.

You can visit fscs.org.uk for more information on the Financial Services Compensation Scheme.

So, whether you’re saving up to make some soap or starting a new club, you can make sure your money is working as hard as it can with an ISA. To find out more about our range, visit kentreliance.co.uk/products/isas.

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