I have been contacted by MoneySuperMarket.com to publish an informative post on Cash ISA accounts. This is a financial product available to residents in the United Kingdom. Since we have UK readers, I thought it would be a nice initiative. In fact, it is pretty similar to the TFSA (Tax Free Savings Account) in Canada on the taxation perspective.
If you live in the UK and want to start saving your money, you should consider a cash ISA. They’re not as complex as some people would have you believe, and in this article I will explain exactly how a cash ISA works, how it can benefit you, and how to get the best out of one.
So, how exactly are Cash ISAs different to traditional savings accounts? Well, there’s only really one major difference between the two – and that’s the fact that with an ISA, you don’t pay tax on any interest you earn. Interest earned in a standard saver will be taxed at the usual 20% (or 40% if you pay the higher rate), whereas with a cash ISA, every penny is yours – although any money you withdraw will cease to receive this benefit.
As it stands currently, a UK based saver under the age of fifty can deposit £3,600 per tax year in an ISA, while over fifties can deposit £5,100. This is due to change at the start of April though, meaning that everybody can pay in the full £5,100 in the 2010/11 tax year. It is worth remembering that any money withdrawn from your ISA still counts towards the yearly amount – for example, if you were to place the full £5,100 in an ISA at the start of the tax year and subsequently withdraw £100, you would not be able to replace it.
Due to the fact that you are not paying interest, an ISA’s interest rate doesn’t need to be as high as a traditional saver’s, for example, a normal saver would have to pay 3.5% in gross interest in order to earn as much net interest as an ISA that pays 3% – and if you’re a higher rate payer, your regular saver account would have to pay 5%.
Once you’ve got your ISA though, don’t just assume you have the best rate – providers change their rates quite often, and the wise saver will do their best to keep abreast of the deals offered. If you do decide to transfer your ISA however, under no circumstances should you withdraw the full balance, as you will receive no tax benefit at all. Your new provider should have a form for you to fill in, and they will then deal with the transfer. Many providers do not tie you to the account for a set period of time, so it is worth checking every so often that you are getting the best rate you can.
As mentioned previously, shopping around a little can bag you a far better interest rate than those offered initially Cash ISAs can make all the difference to your savings account, so finding the best one for you is of the highest importance. Compare cash ISAs at moneysupermarket to get the best deals.
This post was provided by the Cash ISAs  team at moneysupermarket.comGoogle+