Interest on ISA paid direct to current account

Nick1957

Hello. I have a question about interest earned on a cash ISA.

I opened a cash ISA with Coventry BS in September 2024    £20000 was deposited.

I elected to have my interest paid monthly directly into my Lloyds current account rather than let it mount up.

I have just found out that the interest I have received over the last 5 months has actually reduced my tax free sum by £392. Although I still have £20000 in the account and get interest on that, the tax free sum has reduced to £19608.

I can pay the  £392, but I will never actually be able to draw the interest as it taken off the tax free sum.

Is this correct.

masonic

If it is a flexible ISA, then the withdrawal of interest would reduce the amount you were treated as having subscribed to the ISA by this amount. You would be allowed to pay this extra amount into your ISA before the end of this tax year without breaching your annual allowance. You seem to be misinterpreting your usage of the annual allowance as being "tax free amount" whatever that means.

eskbanker

There's no reduction of tax-free sum as such, but the product is presumably flexible and allows you to pay that £392 back into the ISA if you chose to do so, without it counting towards your current year allowance?

If that's not it, then please clarify the basis on which you believe you have a reduced tax-free sum, having already paid in your full annual allowance and still having it all within the account?

slinger2

The tax free amount isn't £19,608, it's still £20,000. However if you'd have left the interest in the ISA you'd now have about £20,400 in there, tax free.

As noted, if it's a flexible ISA you could pay the £392 back in before the end of the tax year and the £392 would be back in the ISA (ie tax free). You might also be able to change your instruction with the provider so that in future interest accumulated in the ISA rather than being paid away (outside the ISA).

OliverLacon

I'm confused by this. Are we saying that any interest automatically paid from the cash ISA to a current account  is treated as a cash withdrawal? So the apparent withdrawal reduces the amount of ISA allowance used  for the current tax year?  I was under the impression that once the 20K allowance had been used for the year (in this example by depositing it into a cash ISA), then no more money could be allocated to pay ISA until the next tax year.

masonic

OliverLacon said:

I'm confused by this. Are we saying that any interest automatically paid from the cash ISA to a current account  is treated as a cash withdrawal? So the apparent withdrawal reduces the amount of ISA allowance used  for the current tax year?  I was under the impression that once the 20K allowance had been used for the year (in this example by depositing it into a cash ISA), then no more money could be allocated to pay ISA until the next tax year.

Yes to the first two questions. Perhaps some reading about ISA flexibility is required. It is possible to withdraw from a flexible ISA, and replace those withdrawals into the same ISA before the end of the tax year, without it affecting your annual allowance.

slinger2

If you withdraw money from a Cash ISA you're taking it out of the ISA system. There's no real concept that what you're withdrawing is the interest or the capital, its just money leaving the ISA.

If the Cash ISA is not "flexible", then you're right. If you've used up your £20k allowance you can't pay any withdrawn money back into the Cash ISA (or any other ISA) until the next tax year.

However, some Cash ISAs are "flexible". That means that money withdrawn from this type of Cash ISA can be paid back into the same Cash ISA as long as it's done in the same tax year that it was withdrawn.

poseidon1

masonic said:

OliverLacon said:

I'm confused by this. Are we saying that any interest automatically paid from the cash ISA to a current account  is treated as a cash withdrawal? So the apparent withdrawal reduces the amount of ISA allowance used  for the current tax year?  I was under the impression that once the 20K allowance had been used for the year (in this example by depositing it into a cash ISA), then no more money could be allocated to pay ISA until the next tax year.

Yes to the first two questions. Perhaps some reading about ISA flexibility is required. It is possible to withdraw from a flexible ISA, and replace those withdrawals into the same ISA before the end of the tax year, without it affecting your annual allowance.

An interesting thread which has inspired me to look much closer at these flexible ISAs.

In my case  all ISA income is withdrawn automatically and spent during the course of the year.

 However I also receive large lumps of  non isa investment income yearly and half yearly. The thought mow occurs I can have my cake and eat it.

 Live off my ISA income, as present but just before the year end reimburse the flexible ISA with the entire withdrawn income using the non isa annual income and rinse and repeat going forward.

The original OPs query and forum responses has been helpful in my understanding how this flexibility can be useful in my circumstances. 

slinger2

poseidon1 said:

masonic said:

OliverLacon said:

I'm confused by this. Are we saying that any interest automatically paid from the cash ISA to a current account  is treated as a cash withdrawal? So the apparent withdrawal reduces the amount of ISA allowance used  for the current tax year?  I was under the impression that once the 20K allowance had been used for the year (in this example by depositing it into a cash ISA), then no more money could be allocated to pay ISA until the next tax year.

Yes to the first two questions. Perhaps some reading about ISA flexibility is required. It is possible to withdraw from a flexible ISA, and replace those withdrawals into the same ISA before the end of the tax year, without it affecting your annual allowance.

An interesting thread which has inspired me to look much closer at these flexible ISAs.

In my case  all ISA income is withdrawn automatically and spent during the course of the year.

 However I also receive large lumps of  non isa investment income yearly and half yearly. The thought mow occurs I can have my cake and eat it.

 Live off my ISA income, as present but just before the year end reimburse the flexible ISA with the entire withdrawn income using the non isa annual income and rinse and repeat going forward.

The original OPs query and forum responses has been helpful in my understanding how this flexibility can be useful in my circumstances. 

I don't know how many Cash ISAs you've got giving you this income but remember that you can only replace money to the same ISA that you withdrew it from. If your ISA income comes from several different ISAs you'd have to make sure that each was flexible and that you replaced the appropriate amount of money into each ISA.

poseidon1

slinger2 said:

poseidon1 said:

masonic said:

OliverLacon said:

I'm confused by this. Are we saying that any interest automatically paid from the cash ISA to a current account  is treated as a cash withdrawal? So the apparent withdrawal reduces the amount of ISA allowance used  for the current tax year?  I was under the impression that once the 20K allowance had been used for the year (in this example by depositing it into a cash ISA), then no more money could be allocated to pay ISA until the next tax year.

Yes to the first two questions. Perhaps some reading about ISA flexibility is required. It is possible to withdraw from a flexible ISA, and replace those withdrawals into the same ISA before the end of the tax year, without it affecting your annual allowance.

An interesting thread which has inspired me to look much closer at these flexible ISAs.

In my case  all ISA income is withdrawn automatically and spent during the course of the year.

 However I also receive large lumps of  non isa investment income yearly and half yearly. The thought mow occurs I can have my cake and eat it.

 Live off my ISA income, as present but just before the year end reimburse the flexible ISA with the entire withdrawn income using the non isa annual income and rinse and repeat going forward.

The original OPs query and forum responses has been helpful in my understanding how this flexibility can be useful in my circumstances. 

I don't know how many Cash ISAs you've got giving you this income but remember that you can only replace money to the same ISA that you withdrew it from. If your ISA income comes from several different ISAs you'd have to make sure that each was flexible and that you replaced the appropriate amount of money into each ISA.

Have a mix of S & S and cash isas, none are flexible.

As a direct result of this thread will be looking at transfers to Paragon and Chetwood's flexible cash isas , and note the interest withdrawn has to go back where it came from. Will be setting up during this tax year for a withdrawal ( redeposit) regime in the next.