Cash ISA at the ISA allowance limit, how does the interest work?

rhodesmjr

Failing to understand after a little searching, maybe someone here can help explain or confirm?

Back in September last year I opened the Coventry BS easy access Cash ISA paying 1.5% interest (accruing monthly), this account allows unlimited transfers in and out of the ISA without using up extra ISA allowance. I gradually increased the balance up to the annual ISA allowance limit (£20k) and then got worried about the account's balance exceeding the annual ISA allowance and started moving the interest out each month into a normal savings account. The ISA account now tells me there is a further £100ish I still have available up to the ISA allowance limit (equivalent to the interest earned to date).

How does the interest work? From my research I understand the interest is both tax free and doesn't contribute towards your personal savings allowance (which I have already maxed out elsewhere). Does the monthly interest compound? And the interest doesn't count to this or next year's ISA allowance? Is that correct? The interest is like a freebie - outside of tax, PSA and ISA allowances? I should probably up my balance to plug that £100ish gap left by the interest I took out if that's the case.

I've also since opened a Cash LISA and put £4k in there, so I have reduced this Cov BS Cash ISA balance down to £16k as the allowance is shared between the two Cash ISA types. The Cov account doesn't seem to recognise this and tells me I can still put a little over £4k in, but that's not the case is it?

Thankyou kindly for any replies!

afis1904

To me it sounds like you would have definitely gone over the ISA allowance since you put about 20k in one ISA and 4k in another one. Even if that money previously was in an ISA it loses its tax free wrapper once you take it out so it's likely you'll be liable for tax on some of it if you're close to your allowance because as far as I understand it the flexibility of the ISA only applies to the actual flexible account

masonic

Your Coventry BS ISA is a flexible ISA, so you can flexibly withdraw money and replace it without it consuming more of your ISA allowance.

The annual ISA allowance is for money you pay into your ISA, it is not consumed by interest paid within the ISA. So your initial withdrawals of interest paid in the cash ISA were unnecessary. Coventry has correctly added these amounts withdrawn back into your ISA allowance, because they were flexible withdrawals of the £20k you originally paid in.

With flexible ISAs it is perfectly acceptable to make a flexible withdrawal and then pay it into an ISA of another type (a Lifetime ISA in this case). So if you withdrew £4k from Coventry and paid it into a LISA, that is fine.

ISA managers will only tell you about money you've paid into ISAs held by them, so you need to take into account the extra £4k you know you paid into the LISA, meaning you need to ensure you have at least £4k available in your allowance reported by Coventry.

rhodesmjr

Thanks for the replies both, appreciate it.

Afis - Thankyou, yes I've played by the rules correctly I think. Moved £4k out of the Cov to the LISA. So my total allowance use didn't go above the £20k limit for the year, it just dipped to £16k for a few days whilst I moved it around and setup the LISA for it.

masonic - So informative and concise there! Thankyou. You've given all the answers I was looking for. I'll top up the Cov ISA equivalent to those unnecessary withdrawals.

afis1904

Ah, I thought you still had 20k in your Coventry ISA. Yeah, it sounds like you played it correctly 

Dazed_and_C0nfused

The interest is like a freebie - outside of tax, PSA and ISA allowances?

Don't forget you may also have the savings starter rate of tax available where up to £5,000 of taxable savings interest is taxed at 0%.

This has to be used before the savings nil rate of up to £1,000 taxed at 0% (aka PSA) even comes into play.

The more your non savings non dividend income (salary, business profits, pension, rental income etc) is the less your savings starter rate is.