Archive: MoneySavingExpert's Money Tips Email

New tax year, new tax-free ISA allowance

Is the £20,000 cash ISA limit taking its final breaths?

It's rumoured the Chancellor will cut the limit to £4,000 later in 2025. Got savings? Using your allowance sooner is likely safer. Earn over 5% tax-free. Best buys below

The new tax year is here, so you've a brand new £20,000 ISA allowance to shelter savings & investments from tax. I know I talked about this a fortnight ago, but that was so last (tax) year.

Yet while the tax year is new, 'ISA season' is already getting old - we're close to the end of the usual short period where firms boost ISA deals to win business while demand is high. Let me take you through it...

How ISAs work | BEST-BUY easy-access cash ISAs | BEST-BUY fixed cash ISAs | How savings tax works | Boost existing ISA rates | FAQs | Lifetime ISAs, Junior ISAs, Shares ISAs

Why sorting sooner is likely safer...

The Chancellor has been evaluating cutting the cash ISA allowance - rumours say to as low as £4,000 - and if that does happen, it's thought it'd likely be announced in the Autumn Budget (though with so much current uncertainty, anything could or couldn't happen, at any time).

The concept behind it is that it'd encourage people to put the money in shares ISAs instead (personally, I'm sceptical if it'd work - many will just keep saving but pay more tax). Of course, everything is pure supposition - I doubt any firm decision has been made yet.

But if it happens as rumoured, it WOULDN'T impact money already in cash ISAs, it'd just cut what you can put in, in future. Whether it'd start immediately, or in January or April 2026, no one knows (including at this point, I suspect, Rachel Reeves). Yet if you plan to save in a cash ISA, all of this would suggest getting it in sooner would seem safer.

Each tax year, every UK adult (aged 18+) currently gets a £20,000 ISA allowance to put money away tax-free in savings via a top cash ISA, or in investments via a shares ISA. You can have all £20,000 in one, or split it across both types (there are other niche ISA types too).

If you don't use this year's ISA allowance, you lose it when the tax year ends (ie, it can't be carried over), which will be 5 April 2026 for this tax year. Yet once it's in an ISA, it stays tax-free year after year, so some who've maxed out every year's allowance have £100,000s protected from tax. So as the last tax year ended just over a week ago...

If you put money in an ISA last tax year, even only just before 5 April, you can now put up to another £20,000 in, as it's a new tax year.

Understanding how ISAs work is a piece of cake... (No apologies, this has been my go-to analogy since 2001, so just gateau-ver it! Also, watch my why ISAs are a piece of cake video explainer) Picture a cake, let's say a chocolate cake for cash savings (though it could equally be a strawberry cake for shares). Normally it's just sitting there, so the tax collector can come and take a bite (of your interest). But think of an ISA wrapper like a protective piece of clingfilm you can wrap around some of the cake. Once your cash is inside, nothing changes - the cash in savings is still cash in savings (so a cash ISA is just a savings account), the only difference is... now the tax collector can't eat any. Our full ISA guide has a detailed Q&A.

A cash ISA is just a savings account you can put up to £20,000 in per tax year where the interest is NEVER taxed (savings themselves aren't taxed, but interest earnt on them is taxable). Just like normal savings, they can be easy-access, notice or fixed accounts, the only difference is they're inside a tax wrapper.

The interest earnt in it DOESN'T count towards your personal savings allowance (the interest you can earn tax-free each year from any form of savings) either, so a cash ISA is an extra allowance... more on how savings are taxed below.

The team have updated the tables below for me at the last moment before we send the email, as rates can change rapidly. Click the guide links at each column's top where we'll update any changes.

PS: Since we drafted the table and started pushing back on the short-term bonuses, two of the main providers offering them have now changed to much-longer one-year bonuses.

Top easy-access cash ISA rates currently BEAT top normal savings. This used to be unusual, but over the last year it's become commonplace. So even if you won't pay tax on interest, if you want easy access, you may as well save in a cash ISA as the rates are higher.

For those who will pay tax on savings interest, the impact is heightened. The top cash ISA standard rate is 4.8% - compare that to what you'd get in the top 4.75% savings rate after tax...

Fixed cash ISAs have an advantage over normal fixes. Top fixed cash ISA rates are lower than normal savings rates. Of course, for those who'd pay tax on the interest (or want to protect money in case they will in future), they're still far better. If not though, on rate alone, normal savings win.

Yet while normal fixed savings require you to lock the money away to get the guaranteed rate of interest, cash ISAs can't lock your savings away, even in fixes. So you can access your money, normally by closing the account, though you will need to pay an interest-rate penalty (90 or 180 days of interest, or more for longer fixes).

So if you're mostly happy to lock money away, but there's a slim chance you'll need to access it, cash ISA fixes are a get-out-of-jail-free card.

Many with old cash ISAs either had poor rates to begin with, or have seen the rate plummet after the first year or so. Check your rate now. If it's worse than those above, ditch & switch! To do that, don't just withdraw the money, as then it's no longer within an ISA. Instead, transfer it.

This is an especially good time to do it, as you can usually combine a transfer with opening a cash ISA for this tax year - though you don't need to be doing that to do a transfer. All the best-buy cash ISAs above allow ISA transfers in.

• To transfer to a higher-rate cash ISA. Open a new one, and on the application form it will ask you about transferring cash ISAs (you can do this whether or not you're also adding new savings). You can transfer some of your old cash ISAs over, or all of the money held in them - it's your choice.
  
  Once you've applied for the transfer, it'll move your savings over, usually within a few weeks. There are no tax-year deadlines on transfers, as your money is already in an ISA. Already got an ISA you want to transfer it into? If it allows transfers (you'll need to check), just ask for a form to do it.
  
  Simon emailed us last year: "Dear Martin & team. Many thanks for your help & advice on your weekly emails. I've just moved all my previous ISAs into one & at a much better rate (which I didn't realise you could do with relative ease), as explained on your excellent website, & am now £725/yr better off!"
  
  
• Got a fixed-rate cash ISA? Check if you can ditch, switch & gain. If your fixed rate is low compared to the best today, you still have an option. You can transfer it to a new provider and pay your current fixed ISAs' interest-rate penalty for early withdrawal. Our fixed-rate cash ISA switch calculator works out if it's worth it for you.

I know many of you will still have questions, so let me try to include answers to some of the most common ones I get. More in our ISA guides.

Q. Is the interest paid into an ISA part of your £20,000 cap? No. Any interest paid stays within the ISA wrapper, but doesn't form part of your £20,000 limit. The limit is on what YOU put into the ISA each tax year. You didn't put the interest in, the savings provider did. So you're fine.

Q. If you can choose between receiving interest monthly or annually, which is best? If you want to access the cash, monthly is best because you can access it more regularly. If not, there's no difference. I suspect you're asking me because the same account will list different rates, eg, one 1yr fix pays 4.52% annually or 4.43% monthly.

This is a technical, not a real, difference. The annual rate includes compound interest. The monthly rate has to assume you withdraw the interest each month, so you don't get interest on the interest. If you don't withdraw it, it would compound and you'd have the same amount.

Q. Is it worth opening a cash ISA even if you aren't going to use your full allowance of £20,000? It's just a savings account you don't pay tax on, so if the rate is higher than normal savings, even if you won't pay tax on interest, then put what you have in there. It may also mean that if you did come into more money in future, you've got more room to protect that too.

Q. Can I have multiple different cash ISAs in the same tax year? Yes. You've always been able to from past years' ISAs, but since April 2024, you've been able to open more than one in the current year too, (eg, a fix and an easy-access) just as long as you're not putting in more than £20,000 in total, though whether a provider will allow you to open two types with it is up to its own rules.

Q. Is it worth combining all my old cash ISAs into one place? Yes, then they can all be with the top payer. Plus it makes it far easier administratively, as then they're all together, and if the rate drops in future, it's simpler to transfer in one go. There are two main exceptions...

- If you wanted different types on the go (say, easy-access and a fix).
- If the total is over the £85,000 savings safety limit, in which case you may want to spread it across a couple of providers.