ISAs: there are so many Qs but the most important one...?

Question

If you are allowed to invest £3k per year in an ISA and profit the interest tax free, what happens the year after?? Your intrest return say £180 (on average if that) will give you £3180 in your account after year 1, say you invest your limit the next year so there is 6k in your account, is the interest calculated on the 6k tax free? or do you only get a 3k tax allowance? and also, if that is the case and you decide to put your £180 (from year1) into another ISA (in year two) and max the investment potential in this (giving you at the end of year two, two ISAs each of 3k) do you recieve tax free interst from both accounts?

Confusing eh??

Answer 1

I have understood that the £3k limit is applicable only to the amount that may be paid in each year.

Hence in year 2, the accrued £3180 can be increased by another £3k, and the tax free interest will then be calculated on an investment of £6180. Alternatively, the £3k could be paid into another ISA and both would run as independent accounts.

Of, course, if you withdrew the £3180 at the start of the second year in order to change to a more advantageous ISA, you would not be able to make any additional payments, as you would already have "used up" your yearly £3k allowance. Better to go for a new second account on preferable terms and leave the first account as it is.

Answer 2

Yes - you earn interest on your interest.

Once you open the account you can invest £3000 each tax year. Do remember that this is an absolute figure. If for example you put in £1000 in May then £2000 in July you have reached your limit for that tax year. If you have some sort of emergency and withdraw £1500 you cannot replace the money because you have already paid in £3000.

If you deposit £3000 in the following year it will - for practically every provider - be added to your existing account. Therefore year 1 deposit plus interest continues to earn interest in subsequent years (whether or not you make a deposit in any particular tax year).

Cash ISA's do not attract charges directly so your choice can, as a general rule, be based purely on the interest rate

.

Answer 3

Yes ...

Each year you can have a new Cash ISA .. if you decide to put it with the same provider as last years, then (unless you insist otherwise) they are combined ... this is usually a good idea because you only pay one set of charges ..

So the best way to look at it, is every year you can 'top up' your Cash ISA with another 3k.

All the money in all your ISA's (plus the interest from previous years that is left in the ISA), will continues to earn interest every year tax free.