Compound interest in an ISA..?

Uriziel

I am really frustrated with how incredibly confusing ISAs are.
There are ISAs that pay the interest into the actual ISA account however you are only allowed £20k of savings in your ISA. Does that mean that unless you are removing these £20k you are breaking the law and have to somehow declare this to HMRC?

What happens if you transfer the ISA..? If you have 20500 in your ISA because of interest from the ISA and you transfer it to another ISA, is that fine or are you again breaking the law..?

gravel_2

Suspect you are confused about ISAs rather than them actually being confusing. The ISA limit currently only relates to how much money YOU can pay in within a tax year.

If your ISA earns interest that pushes the value over £20k this does not go against the ISA rules. That money is not taxable. You are fine.

There are a number of people out there with >£1million in ISAs. 

Transfers of funds from one ISA to another (assuming you ask the providers to handle it, rather than withdraw and deposit manually) are not relevant for the £20k annual limit as it's not new money paid by you into an ISA product.

EthicsGradient

Uriziel said:

I am really frustrated with how incredibly confusing ISAs are.
There are ISAs that pay the interest into the actual ISA account
however you are only allowed £20k of savings in your ISA.
No. You can only add £20k to your ISA per tax year. The money in an ISA can accumulate to any amount.
Does that mean that unless you are removing these £20k you are breaking the law and have to somehow declare this to HMRC?
No.

What happens if you transfer the ISA..? If you have 20500 in your ISA because of interest from the ISA and you transfer it to another ISA, is that fine or are you again breaking the law..?
No.

See comments above.

Aretnap

Uriziel said:

...however you are only allowed £20k of savings in your ISA. 

That's not correct. You are allowed to have as much money as you like in your ISA. The only rule is that you can only pay in £20000 of new money from outside your ISAs in each tax year. Interest payments do not count towards the £20000, nor does money that you already had in the ISA before the start of the tax year, nor does money that you transfer from one ISA to another.

That's what you've misunderstood. Once you get that straight in your head, ISAs aren't confusing at all.

Uriziel

Aretnap said:

Uriziel said:

...however you are only allowed £20k of savings in your ISA. 

That's not correct. You are allowed to have as much money as you like in your ISA. The only rule is that you can only pay in £20000 of new money from outside your ISAs in each tax year. Interest payments do not count towards the £20000, nor does money that you already had in the ISA before the start of the tax year, nor does money that you transfer from one ISA to another.

That's what you've misunderstood. Once you get that straight in your head, ISAs aren't confusing at all.

Just to be very clear... are you saying I can deposit £20k into an ISA EVERY YEAR and over time have even £100k and I earn tax free interest on those entire £100k as long I keep them together and move them as an ISA transfer and never withdraw them?

alternate

As long as the rules don't change it is 20k every year.  Have a read up on ISA millionaires.

eskbanker

Uriziel said:

Aretnap said:

Uriziel said:

...however you are only allowed £20k of savings in your ISA. 

That's not correct. You are allowed to have as much money as you like in your ISA. The only rule is that you can only pay in £20000 of new money from outside your ISAs in each tax year. Interest payments do not count towards the £20000, nor does money that you already had in the ISA before the start of the tax year, nor does money that you transfer from one ISA to another.

That's what you've misunderstood. Once you get that straight in your head, ISAs aren't confusing at all.

Just to be very clear... are you saying I can deposit £20k into an ISA EVERY YEAR and over time have even £100k and I earn tax free interest on those entire £100k as long I keep them together and move them as an ISA transfer and never withdraw them?

Largely, yes:

are you saying I can deposit £20k into an ISA EVERY YEAR Yes, every tax year, if you have the funds of course.

and over time have even £100k Yes, as above there are 'ISA millionaires' out there.

I earn tax free interest on those entire £100k Yes

as long I keep them together No need to keep them together as such, you can have the £100K scattered over as many ISAs as you like.

and move them as an ISA transfer Yes, it's important that any moves are handled as transfers, but you could have the £100K in a single account with no transfers being used.

and never withdraw them? You can make withdrawals from flexible ISAs and replenish them within the same tax year without affecting your annual contribution allowance.

Aretnap

eskbanker said:

Uriziel said:

Aretnap said:

Uriziel said:

...however you are only allowed £20k of savings in your ISA. 

That's not correct. You are allowed to have as much money as you like in your ISA. The only rule is that you can only pay in £20000 of new money from outside your ISAs in each tax year. Interest payments do not count towards the £20000, nor does money that you already had in the ISA before the start of the tax year, nor does money that you transfer from one ISA to another.

That's what you've misunderstood. Once you get that straight in your head, ISAs aren't confusing at all.

Just to be very clear... are you saying I can deposit £20k into an ISA EVERY YEAR and over time have even £100k and I earn tax free interest on those entire £100k as long I keep them together and move them as an ISA transfer and never withdraw them?

Largely, yes:

are you saying I can deposit £20k into an ISA EVERY YEAR Yes, every tax year, if you have the funds of course.

and over time have even £100k Yes, as above there are 'ISA millionaires' out there.

I earn tax free interest on those entire £100k Yes

as long I keep them together No need to keep them together as such, you can have the £100K scattered over as many ISAs as you like.

and move them as an ISA transfer Yes, it's important that any moves are handled as transfers, but you could have the £100K in a single account with no transfers being used.

and never withdraw them? You can make withdrawals from flexible ISAs and replenish them within the same tax year without affecting your annual contribution allowance.

^
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| What he said.

Only thing I'd add is that if/when you get to the point where you have £100K in ISAs, it would be better NOT to keep it together, but to split it between at least two ISAs with at least two banks. This is because the FSCS protection limit of £85K per bank per customer applies to money in ISAs too.

But yes it's perfectly legal to have £100K in a single ISA account, so long as you haven't paid in more than £20K in any one tax year.

XzavierWalnut

Aretnap said:

eskbanker said:

Uriziel said:

Aretnap said:

Uriziel said:

...however you are only allowed £20k of savings in your ISA. 

That's not correct. You are allowed to have as much money as you like in your ISA. The only rule is that you can only pay in £20000 of new money from outside your ISAs in each tax year. Interest payments do not count towards the £20000, nor does money that you already had in the ISA before the start of the tax year, nor does money that you transfer from one ISA to another.

That's what you've misunderstood. Once you get that straight in your head, ISAs aren't confusing at all.

Just to be very clear... are you saying I can deposit £20k into an ISA EVERY YEAR and over time have even £100k and I earn tax free interest on those entire £100k as long I keep them together and move them as an ISA transfer and never withdraw them?

Largely, yes:

are you saying I can deposit £20k into an ISA EVERY YEAR Yes, every tax year, if you have the funds of course.

and over time have even £100k Yes, as above there are 'ISA millionaires' out there.

I earn tax free interest on those entire £100k Yes

as long I keep them together No need to keep them together as such, you can have the £100K scattered over as many ISAs as you like.

and move them as an ISA transfer Yes, it's important that any moves are handled as transfers, but you could have the £100K in a single account with no transfers being used.

and never withdraw them? You can make withdrawals from flexible ISAs and replenish them within the same tax year without affecting your annual contribution allowance.

^
|
|
| What he said.

Only thing I'd add is that if/when you get to the point where you have £100K in ISAs, it would be better NOT to keep it together, but to split it between at least two ISAs with at least two banks. This is because the FSCS protection limit of £85K per bank per customer applies to money in ISAs too.

But yes it's perfectly legal to have £100K in a single ISA account, so long as you haven't paid in more than £20K in any one tax year.

Good point. I had to split 2 Isa's this year to avoid being over £85K.
Looks like it is going to be increased to £110K at the end of 2025.

Aretnap

XzavierWalnut said:

Aretnap said:

eskbanker said:

Uriziel said:

Aretnap said:

Uriziel said:

...however you are only allowed £20k of savings in your ISA. 

That's not correct. You are allowed to have as much money as you like in your ISA. The only rule is that you can only pay in £20000 of new money from outside your ISAs in each tax year. Interest payments do not count towards the £20000, nor does money that you already had in the ISA before the start of the tax year, nor does money that you transfer from one ISA to another.

That's what you've misunderstood. Once you get that straight in your head, ISAs aren't confusing at all.

Just to be very clear... are you saying I can deposit £20k into an ISA EVERY YEAR and over time have even £100k and I earn tax free interest on those entire £100k as long I keep them together and move them as an ISA transfer and never withdraw them?

Largely, yes:

are you saying I can deposit £20k into an ISA EVERY YEAR Yes, every tax year, if you have the funds of course.

and over time have even £100k Yes, as above there are 'ISA millionaires' out there.

I earn tax free interest on those entire £100k Yes

as long I keep them together No need to keep them together as such, you can have the £100K scattered over as many ISAs as you like.

and move them as an ISA transfer Yes, it's important that any moves are handled as transfers, but you could have the £100K in a single account with no transfers being used.

and never withdraw them? You can make withdrawals from flexible ISAs and replenish them within the same tax year without affecting your annual contribution allowance.

^
|
|
| What he said.

Only thing I'd add is that if/when you get to the point where you have £100K in ISAs, it would be better NOT to keep it together, but to split it between at least two ISAs with at least two banks. This is because the FSCS protection limit of £85K per bank per customer applies to money in ISAs too.

But yes it's perfectly legal to have £100K in a single ISA account, so long as you haven't paid in more than £20K in any one tax year.

Looks like it is going to be increased to £110K at the end of 2025.

There's a proposal on the table to do that, but it's probably best not to count any chickens just yet.