Maturing ISA Questions - Tax charged on interested earned when moved to another account

Harpy_leaf

Hello folks,
Hubby and I each put £20k into fixed-rate cashISAs last year which have now matured. We want to transfer the £20k into different ISAs with better rates for this year, and access the interest we have earned on it. I have two main related issues I would love some clarity on. 

1) The longer-term implications of the £20k yearly limit.
2) Interest earned being subject to tax upon withdrawal.

1) I initially thought that £20k was our universal tax free limit for ever, but other threads on here have suggested that we could add up to another £20k each in each year? Can I double-check this - that we can keep adding on up to £20k each year, and it can build up (Obviously mindful of the £85 protected amount), until it is well over £20k tax-free savings? Just as long as we do not add more than £20k in each year?

2) This is the more perplexing one for me: We have a whole series of Santander accounts linked online, and whenever I seek to transfer the interest earned from the ISA into another account (because I have been assuming I could only transfer 20k), Santander warns me that it will be subject to interest? How is this the case? I thought the whole idea was that the savings were tax free. So at the end of all this saving when we wish to use the money in RL for some or other purpose, it will be subject to tax? How can this be? Is this right? Is it just that year on year the interest earned is not subject to tax, but that it will ultimately be subject to tax once we withdraw it for whatever purpose we have in mind? I'm really confused, and would love some clarity here. Because if it ultimately becomes subject to tax: What Is The Point Of An ISA? What is the tax saving made? Ultimately? Say we end up with a savings pot of £85k each and wish to use the £170k towards something like a house purchase, each £85k will become subject to tax, even though it has been invested in Cash ISAs for several years?

I do apologise that I have not been able to extrapolate the answer from previous threads, or if my search queries have not brought the relevant forum threads up.

Keep_pedalling

There is no tax on anything drawn out of an ISA, and there is no limit on how much you can transfer from one ISA to another. The 20k limit applies to any new money added to an ISA.

Harpy_leaf

Keep_pedalling said:

There is no tax on anything drawn out of an ISA, and there is no limit on how much you can transfer from one ISA to another. The 20k limit applies to any new money added to an ISA.

OK, many thanks. Somehow I need to let Santander know that?!? 

eskbanker

Harpy_leaf said:

2) This is the more perplexing one for me: We have a whole series of Santander accounts linked online, and whenever I seek to transfer the interest earned from the ISA into another account (because I have been assuming I could only transfer 20k), Santander warns me that it will be subject to interest? How is this the case? I thought the whole idea was that the savings were tax free. So at the end of all this saving when we wish to use the money in RL for some or other purpose, it will be subject to tax? How can this be? Is this right? Is it just that year on year the interest earned is not subject to tax, but that it will ultimately be subject to tax once we withdraw it for whatever purpose we have in mind? I'm really confused, and would love some clarity here. Because if it ultimately becomes subject to tax: What Is The Point Of An ISA? What is the tax saving made? Ultimately? Say we end up with a savings pot of £85k each and wish to use the £170k towards something like a house purchase, each £85k will become subject to tax, even though it has been invested in Cash ISAs for several years?

Anything withdrawn from the ISA doesn't immediately attract interest, but any interest subsequently paid on that cash wherever it is post-ISA would be taxable, so if you withdraw £170K from ISAs into your current account and use it a week later, it's just that one week's interest that could be liable to tax.

Harpy_leaf said:

Keep_pedalling said:

There is no tax on anything drawn out of an ISA, and there is no limit on how much you can transfer from one ISA to another. The 20k limit applies to any new money added to an ISA.

OK, many thanks. Somehow I need to let Santander know that?!? 

Santander will be well aware of that, even if the way they've worded the warning is open to misinterpretation!

maman

Keep_pedalling said:

... there is no limit on how much you can transfer from one ISA to another. The 20k limit applies to any new money added to an ISA.

That's 20K in each tax year per person. It will only change if the government choose to change the limit. This has been rumoured but that's what it is currently. 

Harpy_leaf

Harpy_leaf said:

Keep_pedalling said:

There is no tax on anything drawn out of an ISA, and there is no limit on how much you can transfer from one ISA to another. The 20k limit applies to any new money added to an ISA.

OK, many thanks. Somehow I need to let Santander know that?!? 

I'm also wondering because of this official wording on the letter from my new ISA provider: "...you must not withdraw the funds yourself to transfer to us as they will lose their tax-free status." But if there is no tax on anything drawn from an ISA then how can this be the case?

eskbanker

Harpy_leaf said:

Harpy_leaf said:

Keep_pedalling said:

There is no tax on anything drawn out of an ISA, and there is no limit on how much you can transfer from one ISA to another. The 20k limit applies to any new money added to an ISA.

OK, many thanks. Somehow I need to let Santander know that?!? 

I'm also wondering because of this official wording on the letter from my new ISA provider: "...you must not withdraw the funds yourself to transfer to us as they will lose their tax-free status." But if there is no tax on anything drawn from an ISA then how can this be the case?

The point they're making is that you need to use the ISA transfer process to preserve the tax-free status - if you withdraw and then redeposit, it counts as new money towards your £20K annual contribution limit, whereas funds transferred directly via the proper process don't impact your annual contribution allowance.

Isthisforreal99

Harpy_leaf said:

Harpy_leaf said:

Keep_pedalling said:

There is no tax on anything drawn out of an ISA, and there is no limit on how much you can transfer from one ISA to another. The 20k limit applies to any new money added to an ISA.

OK, many thanks. Somehow I need to let Santander know that?!? 

I'm also wondering because of this official wording on the letter from my new ISA provider: "...you must not withdraw the funds yourself to transfer to us as they will lose their tax-free status." But if there is no tax on anything drawn from an ISA then how can this be the case?

If you had say £60k in your existing ISA and wanted to get that into a new ISA you do not withdraw it to transfer. As soon as you do that that capital loses it's 'tax free status' and you could only put £20k of it into a new ISA, assuming you haven't already used this years allowance. You would then have £40k outwith an ISA with any interest being taxable.

saajan_12

Harpy_leaf said:

1) The longer-term implications of the £20k yearly limit.

1) I initially thought that £20k was our universal tax free limit for ever, but other threads on here have suggested that we could add up to another £20k each in each year? Can I double-check this - that we can keep adding on up to £20k each year, and it can build up (Obviously mindful of the £85 protected amount), until it is well over £20k tax-free savings? Just as long as we do not add more than £20k in each year?

20k of NEW money per year across all ISAs.
-If you have more than one ISA then you can say pay 5k into one and 15k into another.
-If you transfer form one ISA to another, you have to get the providers to do the transfer from their end so that the system doesnt think its new money. 
-Next year you can add another 20k to either the same or another ISA, making it 40k (plus interest) total, and so on. 

Harpy_leaf said:

2) Interest earned being subject to tax upon withdrawal.

2) This is the more perplexing one for me: We have a whole series of Santander accounts linked online, and whenever I seek to transfer the interest earned from the ISA into another account (because I have been assuming I could only transfer 20k), Santander warns me that it will be subject to interest? How is this the case? I thought the whole idea was that the savings were tax free. So at the end of all this saving when we wish to use the money in RL for some or other purpose, it will be subject to tax? How can this be? Is this right? Is it just that year on year the interest earned is not subject to tax, but that it will ultimately be subject to tax once we withdraw it for whatever purpose we have in mind? I'm really confused, and would love some clarity here. Because if it ultimately becomes subject to tax: What Is The Point Of An ISA? What is the tax saving made? Ultimately? Say we end up with a savings pot of £85k each and wish to use the £170k towards something like a house purchase, each £85k will become subject to tax, even though it has been invested in Cash ISAs for several years?

Theres no tax ever on the interest you earned from the ISA. What they mean is if you transfer the money out and then earn MORE interest, that would be taxable. Eg 
-Deposit 20k into an ISA with 5% interest and leave it for 1 year
-By the end you have 21k, tax free. 
-Then withdraw to a simple 5% savings account and leave it for another year
- By the end of year 2, you have 22,050 ie earned 1050 in interest. That 1050 is taxable because it was earned out side an ISA. That is what Santander is referring to. 

badmemory

What I believe Santander actually means is that if you move the interest out of the ISA into another savings account then any interest made in that account will be taxable.  But if you are continuing to save the money why move it right out of the ISA shelter.  Just make sure when youo are moving your ISA to a new account that you always keep it within the ISA.  I believe that the correct way to do it is to open the new ISA & tell that supplier to get the money from your previous ISA account.

Harpy_leaf

You've all been marvellously helpful thank you!