The UK is facing another difficult year, economically speaking. After a full year of rising inflation, and resulting rises in everything from the cost of bread to the cost of heating one’s home, there is little end in sight. Indeed, the cost-of-living crisis’ impact on household budgets has had a knock-on impact on consumer spending, with the private sector facing a recession that could be the longest in our nation’s history.

Inflation, coupled with the poor performance of the pound against other currencies, has essentially meant that the average household’s money does not go as far as it once did. Savings have become more important than ever to shore up, both to account for last-minute emergencies and keep solid financial plan for the future in place.

But saving is difficult for many, often not a result of poor habits and decisions but instead a poor understanding of the best systems by which to save. Here, we will examine one useful system, in the form of the cash ISA. ISA stands for Individual Savings Account, and is uniquely well placed to serve savers in the long term. But how do they work, and when is a good time to open one?

How Does a Cash ISA Work?
A cash ISA is essentially a savings account, just like any other bank account. However, depending on the type of ISA you open, there are some terms, benefits and caveats that impact your money. All ISA products are tax-free; that is, any interest you earn on your ISA is not diminished by Income Tax.

ISAs can also offer higher rates of interest, though you can only contribute a maximum of £20,000 per year to your ISA – or across all ISAs you have. Typically, higher rates of interest are also ‘hidden’ behind restrictions to access, meaning you cannot withdraw money before a certain time.

Why are ISAs Good for Savers?
ISAs are an excellent option for savers in two distinct ways. For one, the tax-free interest is in addition to your Personal Savings Allowance (£1000 interest tax-free per year), allowing you to accrue interest in a tax-efficient way across a number of accounts. This helps you grow the value of your savings quicker over time.

Limited access accounts also discourage early withdrawals for what might be unnecessary or impulse purchases. If you really need the money – such as to make an important investment or emergency payment – then you can close the account altogether, but will be otherwise disincentivised to use the money.

When is a Good Time?
Strictly speaking, there is no ‘bad time’ to open a cash ISA. You should open one whenever you feel ready to start putting money away for your future. Ideally, this would be after you’ve built up an emergency fund to cover any unexpected costs. However, it is true that the earlier in a tax year you open up an account, the more time you have within that year to earn tax-free interest.