ISA withdrawal vs transfer

Ch1ll1Phlakes

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?

Hi. Sorry for the confusion, I only called it 'harm' as you asked was any harm done to your Natwest ISA.

If you didn't replace the funds in the ISA then you would have lost the £2k allowance from a previous year, which is want I meant as you currently hadn't replaced it. This wouldn't effect your current or future allowances.

Anything from previous tax-years has been built up using previous allowances. For example, £20k for 5 tax-years would be £100k allowances accumulated (plus any interest as it's all within the ISA wrapper). If £2k is withdrawn from this (previous allowances) then if it wasn't replaced you would be down to £98k accumulated. That's why ISA transfers are better for larger sums. If you withdrew all £100k in the example, those allowances from previous years are 'lost' and you'd only be able to deposit up to what's left of the current year allowance.

Hope this helps if it's still not clear let me know.

Ch1ll1Phlakes

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on the internet for the ISA rules I read stuff like: "Taxable interest: Any future interest earned on the money that is withdrawn and re-deposited may become taxable".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?

As @eskbanker says it's whether the interest is earned on money inside or outside an ISA.

Say you've £40k in an ISA, any interest earned on this is tax-free as it's inside the ISA. Let's say you withdrew £30k. The 10k in the ISA still earns interest tax-free but the £30k doesn't as it's now outside an ISA. If the £30k was held in an account paying 4%, over 1 year this would earn £1200 in interest and £200 of this would be taxable as it's over the personal savings allowance (for a basic rate tax-payer with enough wage).

The £30k could still be replaced (if applicable) or redeposited (over 2 tax-years) but the interest earned while the funds are outside the ISA "may become taxable" if enough interest is earned.