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  • FIRST POST
    • AlienSurfer
    • By AlienSurfer 31st Oct 11, 1:38 PM
    • 9Posts
    • 1Thanks
    AlienSurfer
    Cash ISA - interest earned classed as part of new allowance? = It is not. -SOLVED-
    • #1
    • 31st Oct 11, 1:38 PM
    Cash ISA - interest earned classed as part of new allowance? = It is not. -SOLVED- 31st Oct 11 at 1:38 PM
    Hi folks,

    I'll apologise if this question has been asked before, I did search but didn't find it.

    I have a Cash ISA (fixed rate, fixed term) which has matured and been converted into a variable rate Cash ISA. The interest (annual) which had earned from the fixed term Cash ISA has been paid into the variable rate Cash ISA.
    The question is:

    Does this earned interest now count as part of the new years Cash ISA allowance?

    I wanted to transfer the the entire variable rate Cash ISA to another provider, and add additional funds from a current account, maximising this years allowance.
    If the interest counts as 'new money' this would mean that I would have to deduct that interest amount from any 'new money' I add to a new Cash ISA, as to not go over the new years allowance.

    Year 1:
    Open Cash ISA (fixed rate, fixed term)
    5100

    Year 2:
    Transfer old Yr1 Cash ISA (now a variable rate) to new Cash ISA + add new savings:
    (Yr1 money) 5100 + (Yr1 money interest earned) 129.12 + 5340 or 5210.88 (new money).

    I understand the limit for last year was 5100, and this years is 5340. Is the interest earned from the previous years money counted as part of the new allowance, or is it classed as 'old money'?

    They way I look at it, is that the interest is newly earned and is paid out into the new/current tax year, and so is classed as part of the new/current year allowance. Meaning you have to count it as part of the years allowance, and so top it up to the maximum (if so wished).


    I hinted at asking this in Nationwide, and they seemed to indicate that the interest isn't classed as part of the new allowance, and that I could find 5340 in cash and add that in this Tax year, whilst transferring the previous years money and interest earned from another provider, all into
    a new fixed term Cash ISA.

    I must admit that I didn't realise that the ISA had an 'old money' / 'new money' system (hadn't read this site properly) and I had usually gone with a Fixed term bond, along with just a Fixed Term/rate Cash ISA with only the total of the current years allowance, and nothing rolling over - how much tax free status money I have lost because of this is irritating, and I can't get the tax free status back.

    Thanks for any help on this guys and gals.
    Last edited by AlienSurfer; 31-10-2011 at 4:40 PM. Reason: question solved and answered.
Page 1
  • qpop
    • #2
    • 31st Oct 11, 2:04 PM
    • #2
    • 31st Oct 11, 2:04 PM
    As long as you effect a "transfer" to the new provider, rather than withdrawal/deposit, your contributions are safe.

    For the allowances, it is "total input". Interest isn't included in this.

    So Apr 6th 2010 - Apr 5th 2011 total INPUT 5,100.
    Apr 6th 2011 - Apr 5th 2012 total INPUT 5,340.
    I am an IFA, but nothing I say on this forum constitutes financial advice. Always draw your own conclusions and always do your own research.
    • CLAPTON
    • By CLAPTON 31st Oct 11, 2:19 PM
    • 41,658 Posts
    • 30,682 Thanks
    CLAPTON
    • #3
    • 31st Oct 11, 2:19 PM
    • #3
    • 31st Oct 11, 2:19 PM
    interest isn't 'new' money so you have the full 5,340 allowance available to you

    and you don't have to transfer the 'old' isa
    there is nothing stopping you from having two ISAs; keep the old and start the new anywhere you like;
    indeed there was nothing stopping you opening a new ISA on the 6th April 2011 had you wante too

    personally I do in fact transfer mine mainly for simplicities sake
    • AlienSurfer
    • By AlienSurfer 31st Oct 11, 2:40 PM
    • 9 Posts
    • 1 Thanks
    AlienSurfer
    • #4
    • 31st Oct 11, 2:40 PM
    • #4
    • 31st Oct 11, 2:40 PM
    Thanks guys, that's essentially what the person in Nationwide said, in saying "interest is not included as part of the allowance". It seems a bit odd in my way of thinking, however, but then ISA's do to me anyway.

    Money in ISA makes interest. My way of thinking is that this interest is just like a new earning, like pay from a job or something (but without income tax being applied). The only other difference is that it has been made by a bank on your behalf, from money in a Tax Free account. It still reads as new money to me, because it was never there in the first place, and has actually been given to me in the new tax year.

    I believe what you are saying, that the interest just isn't included as part of the allowance, but I am going to try and find a legal mention of that, before I fill in "transfer an additional 5340 from my current account".

    Thanks for the prompt replies.
    • Lokolo
    • By Lokolo 31st Oct 11, 2:43 PM
    • 19,639 Posts
    • 14,644 Thanks
    Lokolo
    • #5
    • 31st Oct 11, 2:43 PM
    • #5
    • 31st Oct 11, 2:43 PM
    Thanks guys, that's essentially what the person in Nationwide said, in saying "interest is not included as part of the allowance". It seems a bit odd in my way of thinking, however, but then ISA's do to me anyway.

    Money in ISA makes interest. My way of thinking is that this interest is just like a new earning, like pay from a job or something (but without income tax being applied). The only other difference is that it has been made by a bank on your behalf, from money in a Tax Free account. It still reads as new money to me, because it was never there in the first place, and has actually been given to me in the new tax year.

    I believe what you are saying, that the interest just isn't included as part of the allowance, but I am going to try and find a legal mention of that, before I fill in "transfer an additional 5340 from my current account".

    Thanks for the prompt replies.
    Originally posted by AlienSurfer
    The rules don't even call it "new money", they call it "subscribed money", which in turn means money you have deposited (subscribed).

    So instead of thinking of it as new money, think of it as a legal term that is subscribed money, which is money you have deposited.

    And you would find that if you did over subscribe, the bank would return the money anyway.
    • le loup
    • By le loup 31st Oct 11, 2:58 PM
    • 3,497 Posts
    • 3,276 Thanks
    le loup
    • #6
    • 31st Oct 11, 2:58 PM
    • #6
    • 31st Oct 11, 2:58 PM
    Thanks guys, that's essentially what the person in Nationwide said, in saying "interest is not included as part of the allowance". It seems a bit odd in my way of thinking, however, but then ISA's do to me anyway
    Originally posted by AlienSurfer
    Your way of thinking is odd, not the ISA rules.
    Anyway, think of it like this:

    6th April, Open ISA, deposit full ISA limit
    5th April next year, interest due .... errrr, does not compute, limit exceeded, does not compute, exterminate, EXTERMINATE! BOOM!
  • dkmax
    • #7
    • 31st Oct 11, 3:02 PM
    • #7
    • 31st Oct 11, 3:02 PM
    Thanks guys, that's essentially what the person in Nationwide said, in saying "interest is not included as part of the allowance". It seems a bit odd in my way of thinking, however, but then ISA's do to me anyway.
    Originally posted by AlienSurfer
    You need to correct your mental model of how ISAs operate if you are to use them to their fullest extent.

    Imagine how complicated ISAs would be if your "interest counts towards allowance" concept was true. What would happen if the interest exceeded the allowance?
    • AlienSurfer
    • By AlienSurfer 31st Oct 11, 3:39 PM
    • 9 Posts
    • 1 Thanks
    AlienSurfer
    • #8
    • 31st Oct 11, 3:39 PM
    • #8
    • 31st Oct 11, 3:39 PM
    Yeah, thats the issue, my way of thinking doesn't fit with how an ISA works. Once I get it to sink in nicely, then it'll work OK. I didn't realise how you could keep an ISA transfer going and end up with lots of cash in a tax free ISA bubble. I always assumed (massively wrongly) that it was X of tax free savings everyone is allowed, not, as it correctly is, X per year, plus previous years.

    I re-read the main page about ISAs:

    "Can I transfer into an ISA without paying new money in?

    Yes. Don't think of this as opening a new ISA, you're simply moving your old ISA into a new provider and can do this separately from opening a new account - providing you never put any money in it.

    Imagine each ISA year's allowance is labelled 2008/9, 2007/8 etc. Once that year is finished you can't add any extra money to that year's ISA (except interest), yet any ISA that accepts transfers in will happily take everything labelled as an old tax year, and not count it as the current year's allowance."

    So, presumably, even interest being earned monthly from the variable rate Cash ISA (which is what the Fixed Term/Fixed Rate became on maturity) is still classed as part of the 2010/11 ISA, and so does not have any effect on the actual subscription limit for 2011/12 (5340).

    So....

    I can fill out my transfer form as:

    This year subscription: 5340 from current account
    Previous years ISA subscription acc's: All funds and close (5229.12)

    Total new Cash ISA balance (after opening): 10569.12

    previous provider Acc: 5100+128.20 (1yr Fixed Interest) + ~0.96 (Variable interest to date).

    I just re-read and re-read some paperwork I found and, although in the worst English I have read in a while, does confirm what you folks are saying. The interest earned from a previous years subscription stays bolted to that year, and doesn't limit the current years subscription allowance.

    I guess I would have liked something to say:

    Your allowance for the tax year 2010/11 is: 5100 (+ interest earned)
    Your allowance for the tax year 2011/12 is: 5340 (+ interest earned)

    Interest earned by a tax years ISA subscription does not count towards a new tax years subscription total.

    Thanks folks, really helpful and quick answers. I think I might have it now.
    • mania112
    • By mania112 31st Oct 11, 3:58 PM
    • 1,949 Posts
    • 745 Thanks
    mania112
    • #9
    • 31st Oct 11, 3:58 PM
    • #9
    • 31st Oct 11, 3:58 PM
    or even more simply, think of it as 'You personally can hand over 5,340' any interest earned is not out of your pocket.

    Similarly, transfers are not out of your pocket and do not factor into the 'maximum contribution allowed'
    • Mikeyorks
    • By Mikeyorks 31st Oct 11, 5:00 PM
    • 10,287 Posts
    • 4,695 Thanks
    Mikeyorks

    Money in ISA makes interest. My way of thinking is that this interest is just like a new earning,
    Originally posted by AlienSurfer
    Were that the case - I would have problems with my Stock and Share ISAs. Where profit in a couple of recent years has significantly exceeded my annual allowance (certainly not this year however!) ....... would that give me a negative allowance for the next year?

    Don't make it more complex than it needs to be. You have an annual allowance ..... and that is purely based on your subscriptions. Externals don't come in to it.

    Some FAQs on the HMRC site :-

    http://www.hmrc.gov.uk/isa/faqs.htm#9

    But that doesn't specifically cover 'does interest form part of my contribution'? The 'Guidance to ISA managers' is a little more in your direction as it clarifies that (1st sentence) it is only your subscription that counts against the allowance :

    6.4 Subscription limits apply only to the amount subscribed, and the amount subscribed is not reduced if an investor makes a subsequent withdrawal. An investor who has not subscribed up to the limit in any year cannot carry forward the difference and add it to the subscription limit for the next year.




    There's another 272 pages of guidance ..... but I doubt, anywhere, will you find it set out as obviously as you want it. As HMRC presumably consider that 'your subscription allowance' is clear enough that it is not mitigated by interest / profit subsequently generated by your subscriptions


    If you want to test the depth of the water .........don't use both feet !
    • AlienSurfer
    • By AlienSurfer 31st Oct 11, 5:11 PM
    • 9 Posts
    • 1 Thanks
    AlienSurfer
    I doubt I'll find much in life set out the way I want it

    After re-reading around, and from this unanimous feedback here, I have gone with that whole sentiment, it does indeed make more sense than my overly complicated thinking.

    I think I'll give the HMRC site a miss, I started reading some of it, and gave up sharpish. It's not going to be in a language so plain it's laughable.

    I think it's pretty clear now, and ISA's aren't as complicated as I have made them for myself.

    Thanks again for the help and understanding folks. Much appreciated.
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