Does interest count towards your ISA allowance?

There are many misconceptions around ISAs; from how they can earn you money, to how much you are allowed to put aside in them every year. And in recent years, the ISA rules have changed, meaning past uncertainties may now be adding further confusion for the general public.

In this article, we’re myth-busting whether savings interest (or investment profits) would count towards ‘using up’ your ISA allowance — on top of what you personally deposit.

Jump straight to the ISA topic that applies to you:

• ISA interest and profits explained
• Cash ISA interest
• Stocks and Shares ISA dividends
• Does Lifetime ISA interest count towards the annual ISA allowance?
• Innovative Finance ISA
• Junior ISA annual allowance
• Monitoring how much of your ISA allowance you’ve used

ISA interest and profits explained

ISAs are ‘tax wrappers’, which is a financial jargon phrase that basically means the money held in that account is tax-free.

So, to answer the question: No — any interest you make does not count towards your ISA allowance. No matter how large your ISA pot builds up to – including the amount of interest that compounds from your deposits – all the money held in an ISA is free from capital gains and income tax.

So, whether it’s:

• The money you choose to deposit into an account
• Interest on savings in something like a Cash ISA
• Or investment profits within something like a Stocks and Shares ISA

None of this would be subject to capital gains tax or income tax when you come to withdraw the money (and for added reassurance, nor is it taxable while it sits inside the account, due to its ‘tax-wrapper’ status).

Cash ISA interest

Cash ISAs help you:

• Save your money for short-term goals (things you hope to achieve in the next five years) in a tax-free way;
• And earn interest at the specific Annual Equivalent Rate (AER%) as either fixed term or variable, as you do so.

When it comes to your ISA allowance (you’re allowed to deposit up to £20,000* during each tax year, spread across all the different types of ISAs you have) it’s only the amount you deposit in the tax year that counts (April 6^th to the following April 5^th).

So, to confirm, any interest earned in a Cash ISA does not count towards your £20,000 allowance.

Stocks and Shares ISA dividends

Stocks and Shares ISAs let you:

• Invest your money for long-term goals (things you hope to achieve in 5-10 years or longer) in a tax-free way;
• And earn profits from these investments when they perform well.

These accounts are focused on investing your money in things like company shares, bonds, or mutual funds (as opposed to cash savings where you could only earn interest).

Any profits you earn in a Stocks and Shares ISA, such as dividends, do not count towards ‘using’ your £20,000 allowance — even when the profits are being automatically reinvested for you (which can lead to a compounding effect).

As you’re allowed to deposit up to £20,000* during each tax year, spread across all the different types of ISAs you have, it helps to know it’s only the amount you deposit during the tax year that counts. Not profits you make on the investments.

Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.

Does Lifetime ISA interest count towards the annual ISA allowance?

Lifetime ISAs can either be:

• A Cash ISA version (earning you interest);
• Or a Stocks and Shares version (earning you profits when investments do well).

However, Lifetime ISAs also offer a 25% top-up from the government on any deposits that you make. To be clear, none of the government top-up, interest, or investment profits would count towards your annual ISA allowance — but Lifetime ISAs do have a £4,000 cap during each tax year, which is worth being mindful of.

That’s not to say you can’t use your remaining £16,000 allowance in the different type of ISAs available to adults in the UK: Cash ISAs, Stocks and Shares ISAs, or Innovative Finance ISAs.

Note: Wealthify doesn’t offer Lifetime ISAs.

Help to buy ISAs

These accounts were designed to help people get on the first rung of the property ladder, and while they are no longer available to open (they’ve effectively been replaced by the Lifetime ISA), some people still have one. You can keep depositing into this existing account until November 2029 and claim the government bonus until November 2030.

Because much like a Lifetime ISA, the government offers a bonus top-up on the Help to Buy ISA contributions (up to a maximum possible bonus of £3,000, if you have saved £12,000).

However, unlike with a Lifetimes ISA, the Help to Buy ISA’s bonus is only claimed when the person purchases their first mortgaged property.

And even then, it’s claimed directly by the solicitor or conveyancer to finalise the property purchase and is handled behind the scenes. So, someone using this account can feel assured that the Help to Buy ISA’s government bonus would not impact their remaining ISA allowance for that tax year.

Note: Wealthify doesn’t offer Help to Buy ISAs.

Innovative Finance ISA

The investment profits from an Innovative Finance ISA won’t affect your remaining ISA allowance for the year.

Innovative Finance ISAs are alternative investing accounts that offer the account holder profits when their investments perform well, rather than the cash interest you’d get from a Cash ISA or standard savings account.

You might see Innovative Finance ISAs offer things like Peer-to-Peer lending or crowdfunding debentures, and while they are considered riskier than a Stocks and Shares ISA, the principle of earning profits through the investments doing well, is the same.

Note: Wealthify doesn’t offer Innovative Finance ISAs.

Junior ISA annual allowance

Junior ISAs are a little different because unlike the other ISAs mentioned, these are solely for children. Even though a parent or legal guardian manages this type of account on behalf of a child, the money inside these accounts belongs to the child, and can only be accessed when they turn 18 (when the account matures into an adult version of an ISA).

Key facts:

• A Junior ISA can either be a Junior Cash ISA or Junior Stocks and Shares ISA.
• The child is only allowed one of each type open at a time (but transfers between providers are possible).
• Their £9,000 allowance must be spread across both types during each tax year.
• The parent/legal guardian still gets their own £20,000 allowance per tax year.
• No matter if they are making interest in the cash version, or profits in the investment type, any additional money your child earns in a Junior ISA is not counted towards their allowance — it’s only the deposits contributed to the account(s) that count towards the allowance.

Monitoring how much of your ISA allowance you’ve used

It’s a positive thing that you’re paying attention to how the ISA allowance works, because as we mentioned earlier, the ISA rules changed back in April 2024.

Before that, there were restrictions on how many ISAs you could open in a tax year. But since the rules changed, it’s now the individual’s responsibility to keep track of how much of your allowance you have used — remembering that this allowance is spread across all the ISA types you are paying into in any given tax year.

This blog should have spared you any concerns you may have had about the specific types of ISAs you hold and how the additional money you earn through compounding interest should not impact the ISA allowance you have remaining for the tax year. It’s only your deposits that count!

*The government has said it will fix this amount until at least 2030, but could be subject to change in the future.

Resources:

1. Government website | How ISAs Work
2. Money Helper | A Guide to Help to Buy ISAs
3. Government website | Innovative Finance ISA Investments For ISA Managers