Does ISA allowance include interest?

rickdews

Does the ISA allowance include the year's interest? For example, if £5,100 is invested in a cash ISA, is the interest still part of the ISA? Where does that money go?

I have an ISA with Intelligent Finance that pays interest monthly. At the end of the tax year the interest will have pushed the total amount in the account to 5,100. So I'm just wondering if I'd could fill it before the end of the year.

RoyalSwank

The allowance relates to what you put in it. Not what happens when its in there.

jimjames

You can put in as much money as the limit for both cash & shares ISAs. Any growth or interest/dividends is on top of the amount you invest.

Masomnia

So no, the interest that is paid into the ISA does not count towards your £5,100 cash ISA allowance.

[Deleted User]

What happens if you pay in more than your annual ISA allowance? I have £790 left of my allowance, but just inherited about £1500 that I'd like to put in my ISA - do I need to wait until April 6th to pay this in?

sorcerer

Yes you need to wait until Apri 6 before you can put more in, which will count towards 2012/13 allowance.

Derivative

As stated earlier, the allowance refers to new deposits only - not any interest accrued or any transfers.

For the sake of argument: picture an ISA with £50k in at 5% per year. If interest counted, almost half of the allowance would be unusable (£2500).

dtsazza

missylisa153 wrote: »

What happens if you pay in more than your annual ISA allowance? I have £790 left of my allowance, but just inherited about £1500 that I'd like to put in my ISA - do I need to wait until April 6th to pay this in?

sorcerer wrote: »

Yes you need to wait until Apri 6 before you can put more in, which will count towards 2012/13 allowance.

That's not strictly true, sorceror - missylisa could pay in £790 of that money now, and would need to wait until April 6 to deposit the rest.

As to what happens if you pay in more - usually nothing bad, especially if it's a first offence and you're not blatantly abusing the system. ISTR that you'll get a letter from HMRC basically saying "ahem", and your bank with either reverse the deposit or charge tax on the interest above the limit.

The main thing is that you shouldn't deposit more than the limit, but if you accidentally do you won't end up in jail or have your ISA seized or anything like that.

dtsazza

rickdews wrote: »

Does the ISA allowance include the year's interest?

As others have said, it doesn't include interest.

The way I think of an ISA is a bit like a bubble, with the account inside it. You're only allowed to pass £5,340 (this year) "through" the bubble, from outside sources into your account. Once the money is inside the bubble, it can grow however it wants and doesn't affect your limit. It's only money that you pay into the ISA wrapper that affects it.

(This is especially true with S&S ISAs too, where growth and dividends are less predictable than cash ISAs. It still applies - the shares bought with ISA funds are inside the bubble, and so unless you are transferring cash into your ISA account, the limits aren't affected.)