What Is a Cash ISA? How They Work in 2026/27
A Cash ISA is a savings account where interest is permanently free of UK income tax. This guide covers how Cash ISAs work, the £20,000 annual allowance, flexible ISA rules, transfers, and how they sit alongside other ways to save. Updated for Budget 2026.
What is a Cash ISA?
A Cash ISA is a savings account where the interest you earn is free of UK income tax — regardless of how much you earn or what rate of income tax you pay. The ISA wrapper — the tax-free status — applies permanently to money inside the account. Interest earned inside a Cash ISA does not count towards your Personal Savings Allowance and does not need to be declared on a self-assessment tax return. (Source: GOV.UK, ISA rules.)
This is the defining feature. A standard savings account pays interest subject to income tax above your Personal Savings Allowance (£1,000 for basic-rate taxpayers, £500 for higher-rate, nil for additional-rate). A Cash ISA pays interest that is permanently tax-free.
How the annual ISA allowance works
Each tax year (6 April to 5 April), you can deposit up to £20,000 across all your ISA accounts combined — the annual ISA allowance for 2026/27. It is shared between all ISA types: Cash ISA, Stocks and Shares ISA, Innovative Finance ISA and Lifetime ISA. All of it can be held in cash, or you can split it between ISA types. The limit applies to what you newly pay in during the tax year, not to the total balance you can hold. Unused allowance at 5 April is lost and cannot be carried forward. (Source: GOV.UK.)
Since April 2024, you can open more than one Cash ISA in the same tax year with different providers, subject to the overall £20,000 annual limit. To open a Cash ISA you must be 18 or older and a UK resident for tax purposes. (Source: GOV.UK, ISA changes, April 2024.)
What happened to the planned £12,000 cap?
At Budget 2025 the government announced plans to limit how much most adults could pay into Cash ISAs to £12,000 per tax year from 6 April 2027, with the overall £20,000 allowance unchanged. At Budget 2026 (28 October 2026) it abandoned that plan. The £20,000 Cash ISA limit stays for all adult savers regardless of age, and secondary legislation implementing the decision is expected to be laid before Parliament in November 2026. (Sources: HM Treasury, Budget 2026; HMRC, Budget 2026 OOTLAR.)
Existing ISA balances were never affected. Some older pages and search results still describe the cap as coming — it is not. Cash ISA limit stays at £20,000: what the reversal means has the detail.
Types of Cash ISA
Cash ISAs are available in the same structures as standard savings accounts — the difference is the tax-free wrapper:
| Type | Rate | Access |
|---|---|---|
| Easy access Cash ISA | Variable | Normally without a notice period |
| Notice Cash ISA | Variable | After a notice period (30–120 days) |
| Fixed-rate Cash ISA | Fixed for the term | Usually restricted until maturity; early exit typically carries a charge |
Flexible vs non-flexible Cash ISAs
Some Cash ISAs are designated as flexible. This matters if you withdraw money during the tax year and want to replace it:
The flexibility designation is set by each provider. If an account is not specifically described as flexible, it should be assumed to be non-flexible. The flexible rule applies within the same tax year only. (Source: GOV.UK; LegalClarity, May 2026.)
Transferring a Cash ISA
You can transfer a Cash ISA to a different provider without losing its tax-free status — but the transfer must go through the official ISA transfer process. If you withdraw the money yourself and redeposit elsewhere, it loses its ISA status permanently and can only be returned to an ISA using your current-year allowance. To transfer, instruct the receiving provider, who will arrange the transfer directly. Transfers do not count against your annual allowance. (Source: GOV.UK; Moneyfarm, 2026.)
Cash ISAs and the Personal Savings Allowance
Whether a Cash ISA rate is preferable to a taxable account depends on your Personal Savings Allowance and individual tax position. The PSA is £1,000 for basic-rate taxpayers, £500 for higher-rate and nil for additional-rate. For savers whose interest does not exceed their PSA, the rate is the most relevant comparison. For higher-rate or additional-rate taxpayers, or those with larger balances, the tax-free wrapper may make a meaningful difference even where a Cash ISA's headline rate is slightly lower.
Tax on savings interest outside an ISA is announced to rise from 6 April 2027: Budget 2026 set 24% / 44% / 49% (basic / higher / additional rate) for savings and property income, to be legislated via Finance Bill 2026-27 and replacing the 22% / 42% / 47% rates previously legislated. The Personal Savings Allowance is unchanged. The illustration below uses the announced rates.
Illustrative only: a simplified example that ignores other savings and income. The rates are announced, not yet enacted.
Cash ISA or Stocks and Shares ISA?
The two are different tools rather than one being better. A Cash ISA's capital does not fluctuate with stock markets, and it is often used for shorter-term savings and emergency funds, but cash can lose purchasing power when inflation exceeds the interest earned. A Stocks and Shares ISA shelters investment gains and income from UK tax and offers the potential for higher long-term returns, but investments can fall as well as rise in value. Because the £20,000 allowance is shared, you can use one type, the other, or both.
The Lifetime ISA
A Lifetime ISA (LISA) is a separate ISA type for a first home or retirement from age 60. You can pay in up to £4,000 a year, which counts towards your £20,000 allowance, and the government adds a 25% bonus.
Budget 2026 confirmed the LISA will be replaced by a new First Time Buyer ISA from April 2029, with a 25% government bonus on the final account balance, paid on withdrawal, up to a maximum bonus of £20,000, towards a first home worth up to £450,000. Primary and secondary legislation are still to be introduced before launch. Existing LISA holders can continue contributing to and using their accounts under current rules, and from 29 October 2026 the withdrawal charge for otherwise-qualifying first-home purchases above the £450,000 cap is reduced to 20%. (Source: HM Treasury, Budget 2026.)
FSCS protection
Cash ISAs at UK-authorised banks and building societies are protected by the FSCS up to £120,000 per eligible person per authorised firm. Different banking brands can share the same banking authorisation.
Frequently asked questions
Sources: GOV.UK, ISA rules; HM Treasury, Budget 2026 (28 October 2026); HMRC, Budget 2026 OOTLAR; HM Treasury/HMRC, Reduction in the Cash ISA limit (Budget 2025 policy paper, since reversed).
This article provides general information, not personalised financial advice. Tax rules and account terms can change.