Fixed Term ISA Monthly Interest Tax?

AP3

I have a Fixed Term ISA, and opted to get the interest paid monthly into my current account, so I can then transfer it into a savings account, in order to benefit from monthly compound interest.

My question is, does this interest become taxable, as it has left the ISA?

refluxer

The interest itself won't be subject to tax as it was earned within an ISA, but any interest earned from that money in the future obviously will be subject to tax.

eskbanker

AP3 said:

I have a Fixed Term ISA, and opted to get the interest paid monthly into my current account, so I can then transfer it into a savings account, in order to benefit from monthly compound interest.

Why not just leave it within the ISA, where it would compound at (presumably) a higher rate while remaining tax-free?

refluxer

If you don't need the interest as income, are you sure that having it paid away each month is a good option ? If you currently have an ISA because you would otherwise pay tax on your savings interest, it would make more sense to retain the interest within the ISA and let the amount of savings you've got shielded from tax grow year after year.

Unless you're paying that withdrawn interest into a really high-paying regular saver (at 7-8%), you may end up worse off by withdrawing it and paying tax on any interest that money earns in the future.

Note that you won't achieve the full AER if interest is withdrawn from the ISA, as that presumes that interest is paid into the ISA and allowed to compound.

AP3

Thanks for all the comments. It's a 1 year fixed deal, so compounding annually is irrelevant right? What I get monthly is 1/12th of what I would see added to the balance on maturation.

Special thanks to refluxer for simply answering my question!

So by putting it in savings, I earn interest on it, and then I can put it back in with my ISA allowance for the following year (hopefully getting another good fixed rate).

I understand that once it's in savings, any subsequent interest earned would be taxable over the £1k allowance.

For context I'm "temporarily retired", so have my full personal allowance available for tax free income from interest.

eskbanker

AP3 said:

Thanks for all the comments. It's a 1 year fixed deal, so compounding annually is irrelevant right? What I get monthly is 1/12th of what I would see added to the balance on maturation.

Special thanks to refluxer for simply answering my question!

So by putting it in savings, I earn interest on it, and then I can put it back in with my ISA allowance for the following year (hopefully getting another good fixed rate).

While accepting that it's not what you actually asked about, I think you're still misunderstanding how interest works!

When accounts offer a choice between monthly or annual interest, the rate paid for the annual option is generally higher, precisely to allow for compounding, i.e. the annual rate will be the equivalent of that earned by having the monthly one compounded, so it would be unusual for you to get 1/12th of the annual rate when receiving interest monthly, and hence the gross rate and the AER will normally be different on monthly interest accounts.

What's the product you have?

refluxer

AP3 said:

Thanks for all the comments. It's a 1 year fixed deal, so compounding annually is irrelevant right? What I get monthly is 1/12th of what I would see added to the balance on maturation.

Special thanks to refluxer for simply answering my question!

So by putting it in savings, I earn interest on it, and then I can put it back in with my ISA allowance for the following year (hopefully getting another good fixed rate).

I understand that once it's in savings, any subsequent interest earned would be taxable over the £1k allowance.

For context I'm "temporarily retired", so have my full personal allowance available for tax free income from interest.

As eskbanker alluded to above, when monthly interest is paid into a 1 year fixed rate account, it will compound monthly and give you the predicted AER which is why I warned (just in case you didn't realise) that by withdrawing it, you'll only get the (lower) gross monthly rate stated for the ISA and not the (higher) AER. 

I guess if you've currently got the whole of your personal allowance to play with then it sounds like it may not actually matter from a tax point of view, but the other consequence of what you're doing is that you're effectively reducing your ISA allowance next year unnecessarily by having to pay the withdrawn interest back in.

AP3

Hi Both, perhaps I am misunderstanding, but I'll need some more explaining!

The two options I had were monthly into a different account to the ISA, or annually paid into the ISA. In both cases the balance of the ISA doesn't change at all during the fixed period, so I'm unclear how it could compound monthly, when the balance only changes annually?

Surely, if it were to compound monthly, then I would have a monthly amount added to the ISA balance every month, which would increase over the year due to compounding?

The product in question is a previous issue of this account: https://www.barclays.co.uk/premier-banking/1-year-flexible-cash-isa/

If you scroll down to the interest rate, monthly and annual interest rates are the same.

I do take the point that I'm "subtracting" from my ISA allowance though, hadn't thought about it like that.

refluxer

I wouldn't worry about what happens to the balance - the important thing to look at is the AER figures.

As the AER for that account is the same for either the monthly or annual interest options, you would have recieved the same amount of interest for either option, but only if it was paid monthly or annually into the account - as monthly interest can only be paid away for this account, then presumably you'll be receiving the gross monthly rate which would be 4.89% (4.89% gross monthly gives 5.30% AER).

I'm not sure why Barclays don't state the gross figure applicable to monthly interest - most other providers that offer the option of having interest paid monthly do state both the gross and AER figures.

eskbanker

That Barclays summary box makes no sense to me at all!

They're saying that monthly interest can only be paid out, rather than retained within the ISA, and they do make it clear that monthly interest therefore won't compound, but their illustrative final balances are stated as being 5.3% higher than starting balance for both monthly and annual interest, which can't be true, as there won't be any interest added to the balance at all with the monthly option....

I'd be intrigued to find out the rate of interest actually being paid monthly - as above this would typically be a lower gross rate than the AER, but they're obliged to specify this in their product literature, so if they've failed to do so then they are effectively obliged to pay out at the higher rate, and OP will indeed be winning by stashing the monthly interest elsewhere.

refluxer

For future info - it's relatively rare for ISA providers to insist that you have monthly interest paid away. I have a number of fixed rate ISAs where monthly interest is paid into the account and therefore the stated AER is achieved.

I actually have a Barclays Flexible Cash ISA that I took out back in March - I would normally have chosen the monthly option because I quite like to see the balance of that type of account growing but I ended up going for annual interest on this occasion because I wanted to achieve the full AER and didn't want the interest paid out of the ISA.