A Cash ISA is basically just a deposit account where the interest is paid without being taxed. It won’t be taxed either – provided that it remains in the ISA. A Cash ISA is a great place to park money (as it is not taxed) for those unlikely to use much of the full £10,680 (2011/12) ISA allowance. You can only contribute £5,340 towards a Cash ISA during the 2011/12 tax year. If you take money out of a Cash ISA that’s too bad (in terms of the allowance) – its measured on what you put in, not what you take out.

For example, if you put £3000 into a Cash ISA and withdraw £1,000, you have still used £3,000 of your allowance for the year.

As ISAs are individual and relate to a tax year, you can build up quite a number of them, perhaps with different Banks. This is not a problem, but you can only have one per tax year. So you couldn’t for example put £3000 with Nationwide and £2000 with Halifax during the same tax year (into a Cash ISA).

If your Cash ISA now has a poor rate of interest you can do one of two things. You may for example now have over £20,000 in various Cash ISAs. You could transfer it to another Cash ISA paying a better rate, the important thing is that you do not cash in your Cash ISA in order to move the money to a better Cash ISA – otherwise you are stuck with the same annual allowance of £5,340. In other words if you cash in your £20,000 in Cash ISAs, you lose the ISA status of that money. Moneyfacts.co.uk is a good place to seek out Cash ISA Transfer rates. I suggest doing their search rather than simply viewing their best buy list.

Alternatively, you could transfer a Cash ISA into a stocks and shares ISA, a form would be required for this, but if this would move the entire Cash ISA. If you only wanted to move £2000 or so from a Cash ISA you would be better off simply withdrawing this from your Cash ISA and writing out a cheque. This is an investment and so can (will) rise and fall in value. However, be warned that you cannot reverse this action. It is possible to hold “low risk” funds within a stocks and shares ISA, but technically you cannot hold cash within one. This can be a good option if you do not expect to use or need the funds for the long-term (over 5 years). An investment should provide a higher sum over the long-term as opposed to cash, not always, but in the majority of cases. You would be wise to see my guide called “Our Approach to Investing” for more information on this.

A Stocks and Shares ISA can have the full £10,680 allowance but only £5,340  if you have used any (even £1) of the Cash ISA allowance in the same tax year. Here is a link to the HMRC ISA factsheet.

It is worth noting that if you are not a taxpayer, then your interest on deposit accounts should not be taxed (unless it is so great that you have to). If you don’t earn enough to pay tax then the Bank or Building Society can provide you with an R85 form which means that your interest will be paid gross (untaxed). You are of course personally responsible for ensuring that you pay the right amount of tax under HMRC self assessment rules. I have put lots of links to the HMRC documents, so do use these sources.

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