Newbie Saver - ISAs and Compounding Interest

LandanLad

Hi all,

How exactly do ISAs work in regards to compounding interest and topping up your ISA each year?

For example, if I save 5,000 each year, at the start of year 4 would I earn (let's say 2% as an example rate) interest on the full 15,000?

Thanks,
LL

jimjames

Yes you would.

But it may not be best option to keep using same ISA as deals will differ each year. Same principle applies though

Archi_Bald

LandanLad wrote: »

For example, if I save 5,000 each year, at the start of year 4 would I earn (let's say 2% as an example rate) interest on the full 15,000?

In year 4, you would also earn interest on any interest you earned in years 1,2, and 3. Similar for year 2 and 3 - compounding is all about interest on interest.

Although the rate you might get in year 4 would most likely be terrible, if you stuck with your original account (and if the original account still allowed deposits). And similar in years 2 and 3.....

Nothing peculiar to ISAs here - - it works the same for any account that pays interest.

The only difference ISAs make is that you get your interest gross, whilst in other accounts, you get paid net after 20% tax. Which may or may not be the tax you have to pay on savings - refer to the HMRC website for details.

LandanLad

Thanks all. Is there a cap, if you keep adding to it each year? Say you had 50k after 10 years saving 5k a year (minus the interest).

badger09

LandanLad wrote: »

Thanks all. Is there a cap, if you keep adding to it each year? Say you had 50k after 10 years saving 5k a year (minus the interest).

No cap. The only limit is on the amount of 'new money' you can pay in each year.

LandanLad

badger09 wrote: »

No cap. The only limit is on the amount of 'new money' you can pay in each year.

That's great. Many Thanks.

CLAPTON

just to be clear

the interest doesn't count as 'new ' money so you can save the whole allowance each year

so this year you can put in 5940 (rising to 15k in July) even if you have 50,000 already saved which may have paid interest of say 1,000 paid on 10th April