Cash ISA - Interest 'paid away' loses tax free status?

alphabetty3

The West Brom Building Soc offers a fixed rate cash ISA @ 4.56% until Nov 27.

I would like to take the monthly interest earned, on the deposit/capital, and have it paid into my current account with a high st bank to help with monthly expenses.

The T&Cs say that 'paying away' the interest means it will lose its tax free status?

I thought that the interest earned on cash ISAs was tax free?

Excerpt from the West Brom product overview ….

"Interest is fixed and paid on 30 November 2026 and on maturity (30 November 2027), or monthly.

Interest can either be added to the account, paid into another account with the West Brom Building Society (subject to being permitted by the T&Cs of that account), or paid to another UK bank/building society account.

Please note that any interest paid away will lose its tax-free status"

eskbanker

It just means that the money withdrawn is then outside the tax wrapper, so any interest earned on it thereafter is taxable, i.e. there isn't an immediate tax liability on withdrawal but it relates to subsequent interest paid on it.

However, if you're withdrawing it to help make ends meet, then it presumably won't be earning any significant interest after withdrawal anyway?

alphabetty3

Thank you. So if I transfer my current ISA, worth GBP100,000, into their cash ISA product - my monthly interest will be approx GBP380. I can transfer the interest earned into my bank account and choose whether to spend it the GBP380 or save it - but if I save it then depending on the financial investment (i.e. NS&I income bonds), tax may be due … over the personal savings allowance?

eskbanker

https://forums.moneysavingexpert.com/discussion/comment/81970479#Comment_81970479

Yes, that's right, but if you intend to save that money you'd be better keeping it within the ISA.

alphabetty3

Perfect, thank you. So the interest earned is not tax free in perpetuity.

maman

Yes, that's right.

If you just leave interest in the ISA to accumulate then it's tax free.

If you take it out and put it into a savings account then potentially it could be taxable if you exceed your tax free savings allowance over the year.

Isthisforreal99

https://forums.moneysavingexpert.com/discussion/comment/81970492#Comment_81970492

You are making it more complicated than it is. Interest earned from tbe ISA is tax free whether you leave it in the ISA or pay it away.

Interest earned outwith an ISA is taxable.

eskbanker

https://forums.moneysavingexpert.com/discussion/comment/81970492#Comment_81970492

Not sure that's a particularly useful way of looking at it - personally I'd favour the simple view that money inside an ISA is sheltered from tax (income tax and CGT) but money outside an ISA isn't.

Rich2808

If you leave the interest paid in your ISA then you get interest on that interest the next year - tax free.

If you withdraw that interest and put it in a non ISA savings account the future interest on that withdrawn interest is taxable.

maman

https://forums.moneysavingexpert.com/discussion/comment/81971028#Comment_81971028

Only taxed if the OP has savings above the allowance. I'm assuming this is £1000 in this case,although if OP needs to withdraw the interest from ISA for everyday expenses then maybe they have few other savings anyway.

QQQQQQQQ_Y

If you leave the interest in the ISA it is tax free. If you take the interest from the ISA and put it into another savings product then it is potentially liable for tax. If you take the interest from the ISA and buy everyone in the pub a drink you pay VAT on it.

All the time interest remains within the ISA it is tax-free and interest compounds from one year to the next, if you remove the interest from the ISA there is a potential tax liability (though some things such as food have no tax liability), beer does, but not Martin Lewis' ISA cake - because cakes unlike biscuits do not attract VAT.