ISA withdrawal vs transfer

badger09

chinadog1 said:

HI,
I'm new to this forum and also not very good with ISA rules. Please can you help?

I have an existing easy access ISA with the NatWest which I haven't used for a few years (it just collects interest each year) and opened another recently with YBS in order to transfer some funds to keep the maximum in the NW ISA to below £85,000.
They way I did this was to withdraw £2000 from the old NW ISA to my current account, then deposited this £2000 straight into my YBS ISA on opening. This was late September 2025.
I have just realised that I should maybe have asked the YBS to do a transfer for the £2000, but I didn't realise this was the correct way at the time.
Now that the YBS ISA is open, what are the tax implications of what I have done?  Will I have to pay tax on the £2000 which is now in the YBS ISA, even though it was only sat in the current account for a day or so?

Has this done any harm to the old NW ISA also?

Any help would be appreciated.

Best wishes to all.

  

Was the NatWest ISA from which you withdrew £2k, a Flexible ISA by any chance?

chinadog1

Yes it was a flexible ISA.

badger09

chinadog1 said:

Yes it was a flexible ISA.

In that case, when you have the cash available, you can simply pay £2k back into your NatWest ISA before 5th April 2026. 

As you’ve paid £2k into YBS this tax year, you can still pay up to £18k (of new money) into any ISA of your choosing before 5th April 2026. 

What exactly do you want to achieve? 

Transfer all your NatWest ISA to one or more, paying a higher rate?
Transfer some of your NatWest ISA?

Ch1ll1Phlakes

Ok, after a quick read through the thread, you have;

1) A flexible ISA with Natwest with approx £85k at 2.75%
2) An ISA with Virgin Money with £2k deposited in the 25/26 TY with interest at 4.05%
3) An ISA with Yorkshire BS with £2k deposited in the 25/26 TY with interest at 3.75%

From this you've deposited £4k in this tax-year. You are allowed to open more than one ISA in a tax-year so that's fine. There's also no tax implications with this withdrawal and deposit.

As mentioned above as the Natwest ISA is flexible you could replace the £2k into this ISA and this would keep your previous allowances and the £4k in this tax-year would leave your current year allowance at £16k. The only 'harm' done to the ISA currently is the loss of £2k worth of previous years allowances with you've accumulated but the £2k deposit would correct this.

The point made by @eskbanker is key. £85k at 2.75% generates about £2337.50 in interest. However, if you were to transfer this to the VM or YBS ISA you'd be getting a higher interest rate. With VM you'd generate around £3442.50 so over £1100 more in interest alone.

Now, as you've approx £85k with Natwest and you stated that you transferred the YBS funds to keep the value under £85k I doubt you would want to transfer all of your Natwest ISA to a single provider. Natwest allows partial transfers so you should be able to send part of the funds to VM or a different provider and then the rest to YBS or someone else. For example, transfer £68k to VM for a total of £70k held with them and then the rest, around £27k plus interest to YBS for a total of £29k.

Note, please remember the £85k protection limit applies to each provider and not each account. If you have other accounts with any of the three providers above, it is the combined total you hold with them that may fall above this limit. For example, if you have say £5000 in a current account with Natwest, you'd currently be holding £90k with them, which is over the £85k FSCS protection limit (i.e the £85k is protected but not the £5k over this). EDIT: After rereading you mention the withdrawal to your current account which I assume is with Natwest so this may already be the case.

Hope this has been helpful rather than confusing but if you need any help or further explanation just shout.

chinadog1

Thank you so much to everyone for answering my questions, this has been really helpful and I need to sort out my finances for 😃. My main concern was any tax implications which I know now that there aren't any. 
Cheers

Albermarle

chinadog1 said:

Thank you so much to everyone for answering my questions, this has been really helpful and I need to sort out my finances for 😃. My main concern was any tax implications which I know now that there aren't any. 
Cheers

Although in reality you are losing more from having a poor interest rate, than any tax you might have had to pay.

chinadog1

Hi
The comment from Ch1ll1Phlakes has me a little confused "The only 'harm' done to the ISA currently is the loss of £2k worth of previous years allowances with you've accumulated".
Does this mean that I have lost the £2k worth of allowances forever or will this reset back to £20k on 6th April 2026?

jimjames

chinadog1 said:

Hi
The comment from Ch1ll1Phlakes has me a little confused "The only 'harm' done to the ISA currently is the loss of £2k worth of previous years allowances with you've accumulated".
Does this mean that I have lost the £2k worth of allowances forever or will this reset back to £20k on 6th April 2026?

Previous allowances have absolute no bearing on future year's amounts. The new limit is £20k (currently) in April 2026 regardless of any other money paid in previously. If you return the £2k to your NW ISA before 6th April 2026 then you will retain the full allowance you had in that account without using up any of your current or future allowances. That's the beauty of flexible ISAs that it allows money to be returned into the same ISA in the same tax year. In terms of tax the important thing to remember is that money inside ISAs is always tax free.

chinadog1

Thanks for the clarification, that's reassuring.
What still confuses me is when I look on the internet for the ISA rules I read stuff like: "Taxable interest: Any future interest earned on the money that is withdrawn and re-deposited may become taxable".
If it's re-deposited in an ISA then surely it's exempt from tax?

eskbanker

chinadog1 said:

Thanks for the clarification, that's reassuring.
What still confuses me is when I look on the internet for the ISA rules I read stuff like: "Taxable interest: Any future interest earned on the money that is withdrawn and re-deposited may become taxable".
If it's re-deposited in an ISA then surely it's exempt from tax?

Interest earned on money while within an ISA isn't taxable, but interest earned on money while outside an ISA is.

There will undoubtedly be stuff online that manages to make that less clear!