What is a cash ISA?

An ISA or 'Individual Savings Account' is a special kind of bank account with unique tax rules.


Tax status
Savings held in a cash ISA account are subject to neither income tax nor capital gains tax. 
Despite being tax free during the lifetime of the holder, a cash ISA is still subject to Inheritance Tax in the normal way if the holder dies. 


Eligibility
You must be at least 16 years of age to open a cash ISA, and 18 years of age to hold a stocks and shares ISA (the latter is beyond the ambit of this article).


It is typically free to open a cash ISA, but individual providers may vary so be sure to ask appropriate questions. 


Making deposits
There is a limit to how much you are allowed to deposit in your cash ISA each tax year. The tax year runs from the 6th of April to the 5th of April. The deposit threshold changes from year to year but is currently at £5,640 for a cash ISA for 2012/2013. 

There is no restriction on when or how much you may withdraw, but the maximum deposit allowance is not replenished by withdrawals: if you were to deposit £5.640 one day, and withdraw £5,000 the next, you would not be permitted to make a further deposit during that tax year in spite of the fact that the ISA would be holding only £640.

You may only make deposits while you are residing in the UK. If you were to move abroad, you could still hold your ISA and existing savings would still gain interest, but you would not be permitted to make further deposits. 


Transfers
The maximum deposit allowance is personal to you, not to the account. ISAs can also usually be transferred from bank to bank without affecting your deposit allowance; however, as you are allowed to hold only one cash ISA at any given time, a transfer would mean transferring ALL of the funds and closing the existing cash ISA. Some providers may charge a fee for carrying out this transfer, so be mindful and ask questions if you're unsure. 


Other considerations
When considering whether to make a deposit into an cash ISA, be mindful of interest rates. Some ISAs pay such pitiful rates that it can sometimes be more lucrative to hold the money in a taxable account.


Conclusion
It is typically a good idea to make the most of your deposit allowance on a cash ISA, but be aware of interest rates and think about whether your money could work better for you elsewhere.