CASH ISA confusion - help for 'dummies' please

Teacholic

Hello guys. I'm hoping to get some clarity with this post whether CASH ISA is for me. I have quite a limited knowledge of finances and apologise in advance if the questions I ask seem obvious for more knowledgeable forum users. 

I have 30k in savings currently. So far I've been keeping them on my regular bank account (Barclays). I am planning to put aside 12-20k within 2 years. My annual salary almost already exceeds basic tax rate range. I'm planning to take some extra work soon that will put me into a higher earning tax bracket (40%). Therefore I started to look into ISAs. I am hoping to increase savings for a deposit for a house (first time buyer) but also help with bigger purchases. I am planning to take on LIFE ISA until I buy a property and put in the max of the allowance (4k) each year to get extra 1k each year added. I wanted to spread the remaining of my savings and ISA allowance into Cash ISA (looking at 2 years fixed with 4.35% interest rate). As I will be higher tax rate payer soon I am not considering higher interest rates savings accounts as I will only be allowed to have £500 tax free. I would rather maximise the savings via CASH ISA.

I looked at CASH ISA info and I am confused about how it works. With LIFE ISA you can only use it for either property or retirement. However, it seems that CASH ISA can be used for anything you'd like similar to if using a saving account. It is important to me to be able to access my savings at least after 2 years as I might need them for the deposit or other expenses. Although current recession means it might take me longer to get on a property ladder. I tried getting an info around this and googling but struggled to find out about certain aspects of the CASH ISA. Here are some areas and questions I have and hoping you could help with. I will appreciate your patience and explaining things in the simplest way possible. Apologies for perhaps using some terms wrongly, as I just started researching the savings accounts and ISAs. 

1) RE CASH ISA. After fixed rate time ends and savings from the interests reached maturity, how can I access and use the contributions I put and the savings from the interest to pay for bigger purchases, such as paying for a car or furniture, without losing all or some of the savings from he interest? I read that if you move the money from CASH ISA account into a bank account you lose the savings from the interest you accumulated )as they are tax free), which then for me seems pointless having CASH ISA altogether. How people are using the savings from CASH ISA interests to make purchases? Or am I missing the purpose of CASH ISA?

2) I am also not sure how interest rates are calculated in CASH ISA accounts? If I pay into CASH ISA account the max yearly annual allowance (16k for CASH ISA as planning to put 4k a year into LIFE ISA), does it make a different if I spread this 16k over 12 months or pay in one lump at the beginning of a new tax year? Do I get more savings from interest paying in the lump at the beginning of the tax year/when opening an account or if I contribute 1.3k a month instead?

3) Is CASH ISA interest earned on only contributions you made or also on the savings from interests from the previous tax year? Planning to open CASH ISA in November 2022 and pay in 16k straight away (contribution). If I put 16k in the first tax year and my savings from the interest are around £600 until 6th April 2023, will interest in tax year 23/24 be paid on A) 16,600 + new contributions in a new tax year? Or b) new contributions I pay in only in this tax year (planning adding another 16k in 23/24) or C) contributions I paid in previous tax year (16k) and contributions I paid in the next/current tax year (another 16k), so totalling 32k contributions or D) contributions from both tax years and savings from interest from tax year 22/23, i.e 32,600?

3) I'm thinking to get fixed rate 2 years cash ISA I mention earlier sometime in November this year so the maturity will be around mid November 2024. So it'll be 7 months into a tax year 24/25. Howe does it work when you use your savings from CASH ISA account, including the interest savings before the tax year ends? I suppose this linked to a previous question, 2, but wanted to make sure I have a good understanding of how CASH ISA works. 

I realise that there's a lot of questions here but I am genuinely confused and the more I read and look, the more confused I get. Your help is much appreciated.

Warmest wishes,

Teacholic 

eskbanker

Teacholic said:

1) RE CASH ISA. After fixed rate time ends and savings from the interests reached maturity, how can I access and use the contributions I put and the savings from the interest to pay for bigger purchases, such as paying for a car or furniture, without losing all or some of the savings from he interest? I read that if you move the money from CASH ISA account into a bank account you lose the savings from the interest you accumulated )as they are tax free), which then for me seems pointless having CASH ISA altogether. How people are using the savings from CASH ISA interests to make purchases? Or am I missing the purpose of CASH ISA?

Interest on savings (the usual phrasing, rather than 'savings from the interest') within a cash ISA is tax-free, but if you withdraw money from a cash ISA then subsequent interest earned on it no longer has that benefit, so you don't lose interest as such.

Teacholic said:

2) I am also not sure how interest rates are calculated in CASH ISA accounts? If I pay into CASH ISA account the max yearly annual allowance (16k for CASH ISA as planning to put 4k a year into LIFE ISA), does it make a different if I spread this 16k over 12 months or pay in one lump at the beginning of a new tax year? Do I get more savings from interest paying in the lump at the beginning of the tax year/when opening an account or if I contribute 1.3k a month instead?

Just like savings in a non-ISA savings account, interest will be calculated based on daily balances, so you'll earn more the longer the money is in there. 

Teacholic said:

3) Is CASH ISA interest earned on only contributions you made or also on the savings from interests from the previous tax year? Planning to open CASH ISA in November 2022 and pay in 16k straight away (contribution). If I put 16k in the first tax year and my savings from the interest are around £600 until 6th April 2023, will interest in tax year 23/24 be paid on A) 16,600 + new contributions in a new tax year? Or b) new contributions I pay in only in this tax year (planning adding another 16k in 23/24) or C) contributions I paid in previous tax year (16k) and contributions I paid in the next/current tax year (another 16k), so totalling 32k contributions or D) contributions from both tax years and savings from interest from tax year 22/23, i.e 32,600?

You're certainly not the first to misunderstand this, but cash ISA interest has nothing to do with tax years - the only significance of tax years is the annual contribution allowance.  If you open a cash ISA in November 2022, the interest payment schedule will form part of the Ts & Cs and could be monthly, annually (typically anniversary of opening), or on maturity (for a multi-year fixed term), but will be calculated based on daily balances as above. 

Teacholic said:

3) I'm thinking to get fixed rate 2 years cash ISA I mention earlier sometime in November this year so the maturity will be around mid November 2024. So it'll be 7 months into a tax year 24/25. Howe does it work when you use your savings from CASH ISA account, including the interest savings before the tax year ends? I suppose this linked to a previous question, 2, but wanted to make sure I have a good understanding of how CASH ISA works.

You already asked question number 3   As above, the change in tax year makes no difference to interest earning.


Edit: just to revisit this, you do seem to be overthinking this, so probably worth bearing in mind that cash ISAs are much the same as any other type of savings account, especially in the mechanics of how interest is calculated and paid.  The only variances of any significance are:

1. No more than £20K can be paid into ISAs in any tax year
2. Interest earned from ISAs is tax-free
3. Fixed term ISAs can be accessed before maturity (subject to early withdrawal penalty), whereas fixed term non-ISAs usually aren't accessible early. 

Albermarle

Top cash ISAs: up to 2.25% easy access, up to 4.4% fixed - MSE (moneysavingexpert.com)

sue2019

I am trying to understand the point about interest earned on a cash ISA? If the interest is transferred into a current bank account and used for paying bills and purchases, does that amount of interest become taxable?

friolento

sue2019 said:

I am trying to understand the point about interest earned on a cash ISA? If the interest is transferred into a current bank account and used for paying bills and purchases, does that amount of interest become taxable?

You usually leave the interest in the ISA so you can earn interest on the interest in future years.

But you are free to withdraw the interest (or any of your balance) from easy access ISA accounts any time you like. It’s a bit different for fixed term ISAs - some might allow you, or even force you, to pay the interest to a current account, others will only pay interest into the ISA. You can withdraw from fixed term ISAs with a penalty- see the T&Cs of the respective ISA.

In all cases, interest earned in an ISA is tax free. It stays tax free so long as it remains in the ISA. Once you move money out of an ISA, any interest this money earns from then on is taxable interest.

jimjames

Teacholic said:

I have 30k in savings currently. So far I've been keeping them on my regular bank account (Barclays). 

If you mean current account where you are getting no interest that means you're losing at least £100 a month compared to using a savings account that pays interest. Quite a lot to be giving away to your bank.

Middle_of_the_Road

jimjames said:

Teacholic said:

I have 30k in savings currently. So far I've been keeping them on my regular bank account (Barclays). 

If you mean current account where you are getting no interest that means you're losing at least £100 a month compared to using a savings account that pays interest. Quite a lot to be giving away to your bank.

Hopefully OP got his saving strategy in order, his initial post being over two years ago 🤔