1 It’s all in the name
The most important thing to know about cash Isas, or any Isa for that matter, is what the acronym stands for: individual savings account. That’s all they are; somewhere sensible to stick any spare savings you might have. The only catch is that there is a maximum amount you can add into an Isa each year: £20,000. So if you have, say, £35,000 saved up in your regular bank account, you can pay £20,000 into a cash Isa this tax year, which ends on 5 April 2025, but you’ll have to wait to deposit the remainder until the next tax year into the same or any other Isas you have in your name. Everyone in the UK aged 18 or over gets an Isa allowance at the start of each tax year.
2 Tax free
Any interest you earn is tax-free. Forever. That’s right, provided you keep your savings in a cash Isa, they’re invisible to the taxman, making opening one a no-brainer. To be clear, the personal savings allowance (PSA), which was introduced in 2016, means almost everyone can earn some tax-free interest on any savings, but this is capped at £1,000 per year for basic 20% rate taxpayers and £500 per year for higher 40% taxpayers*.
3 Shop around
To earn the most interest all you need to do is to shop around for the provider offering the highest rate. The general rule of thumb is that fixed-term Isas offer better rates, but beware: many of them charge you a sizable interest penalty if you want to access any of your cash during the year.
That makes the cash Isa from Trading 212 a great option for several reasons. Not only does it currently offer 5.1% AER variable (which means it might go up or down depending on whether the Bank of England decides to raise or cut the base rate), but the Isa is what’s called flexible: you can withdraw as much cash as you like, whenever you like, without being penalised. It’s a cinch to open online and, what’s more, Trading 212 doesn’t charge any fees and pays your interest daily.
“If it compounds daily, you see the benefits daily and you get interest on interest,” says Ramin Nakisa, who runs PensionCraft, which offers courses in financial education for anyone keen to learn how to invest their money.
4 Use it or lose it
At the end of the tax year, you have two options. You can either leave your money where it is, earning interest, or you can open a new cash Isa with a different provider and move it there. Remember, your £20,000 allowance restarts every 6 April, so you can either keep paying into your old Isa or pay into a new one. You can have as many cash Isas as you like, provided each new one is opened in a new tax year.
But remember one thing: if you don’t use your entire Isa allowance in a single tax year, you can’t carry any of the allowance over to the next year. That is why you should invest as much as you can, when you can. Use it or lose it, in other words. (Savings of up to £85,000 are protected by the Financial Services Compensation Scheme: because Trading 212 is not a bank, it splits your money into one or more accounts at systemically important banks such as Barclays or JP Morgan.)
5 The right way to change
If you decide to change providers to one with a higher interest rate or fewer penalties – in case your current Isa is not flexible – you will need to transfer your Isa, rather than withdraw and redeposit. That’s because if you just withdraw your money, it will count towards that year’s tax-free allowance despite having previously sat in an Isa. Transferring is easy: just contact the new provider, fill out an Isa transfer form and they will do the rest.
6 Is that it?
No, not by any means. There are also stocks and shares Isas for those investing for the long term, and innovative finance Isas, which let you take advantage of a few things that other Isas don’t, such as peer-to-peer lending and certain property funds.
Alternatively, if you’re over 18 but under 40 years old, you can open a lifetime Isa to save up to £4,000 every tax year towards a first home – to the value of £450,000 or less – or your retirement. The best bit is the government adds a 25% bonus on top of what you save, which means you could get £1,000 of free cash each year.
You can use the cash, as well as the bonus, of course, for a deposit on your first home, or you can keep it until you turn 60. This bonus is paid every year you save something into your lifetime Isa, until you hit age 50. Oh, and if you pay £4,000 into a lifetime Isa, you’ll have a £16,000 maximum on any cash Isa that tax year.
Visit the Trading 212 website for more detailed information on how to open a Trading 212 Cash ISA
Seek independent investment advice before entering into any financial transaction. When investing, your capital is at risk.
*Tax treatment depends on your individual circumstances and regulations, which may change.