Does Interest Count Towards the ISA Limit?

An Individual Savings Account (ISA) allows savers and investors to earn tax-free interest, dividends, and capital gains. Many people wonder whether interest earned in an ISA counts towards the annual ISA limit. The short answer is no—interest does not reduce your annual ISA allowance.

This guide explains how ISA limits work, whether ISA interest is tax-free, how it is calculated, and when it is paid.

What is an ISA?

An ISA (Individual Savings Account) is a tax-free savings or investment account available in the UK. Any interest, dividends, or capital gains earned within an ISA are free from tax, making it one of the most efficient ways to save.

The ISA allowance for 2024/25 is £20,000, meaning you can deposit up to this amount into ISAs within a tax year.

There are four main types of ISAs:

• Cash ISA – A tax-free savings account.

• Stocks & Shares ISA – Invests in shares, funds, and bonds with tax-free growth.

• Innovative Finance ISA – Includes peer-to-peer lending and crowdfunding.

• Lifetime ISA (LISA) – Helps save for a first home or retirement with a 25% government bonus (max contribution £4,000 per year).

Each tax year runs from 6 April to 5 April, and unused ISA allowances do not roll over.

What is an ISA Allowance?

The ISA allowance is the maximum amount you can deposit into an ISA each tax year.

For 2024/25, the total allowance is £20,000, which can be spread across multiple ISAs. However, you cannot exceed the total £20,000 limit across all ISAs combined.

Do You Pay Tax on ISA Interest?

No, any interest earned within an ISA is completely tax-free, meaning:

• You do not pay Income Tax on interest from a Cash ISA.

• You do not pay Dividend Tax on investments in a Stocks & Shares ISA.

• You do not pay Capital Gains Tax on profits from selling investments in an ISA.

This tax-free status makes ISAs more attractive than standard savings or investment accounts.

Is ISA Interest Tax-Free?

All interest earned inside an ISA is tax-free, regardless of how much you earn.

Even if you are a higher-rate taxpayer, your ISA interest will never be taxed, unlike regular savings accounts where tax is deducted once you exceed the Personal Savings Allowance (£1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers).

Does Interest Count Towards Your ISA Limit?

Interest does not count towards the ISA contribution limit.

For example, if you deposit £20,000 into a Cash ISA and earn £500 in interest, the total value of your ISA would be £20,500, but you have not exceeded the £20,000 contribution limit.

The ISA limit only applies to new deposits, not interest or investment growth.

When is ISA Interest Paid?

Interest payments depend on your ISA provider and the type of ISA.

• Easy access Cash ISAs pay interest monthly or annually.

• Fixed-rate Cash ISAs pay interest at the end of the fixed term or annually.

• Stocks & Shares ISAs pay dividends or capital gains depending on market performance.

Interest is always added tax-free, increasing the total balance of your ISA without affecting your contribution limit.

How is ISA Interest Calculated?

ISA interest is calculated in the same way as standard savings accounts:

• Daily interest – Some ISAs calculate interest daily and add it monthly.

• Annual interest – Interest is calculated and added once per year.

• Compound interest – Interest is earned on both your original deposit and previous interest, allowing savings to grow faster over time.

The higher the interest rate and the longer you save, the more you earn tax-free.

Final Thoughts

Interest earned within an ISA does not count towards the £20,000 ISA allowance. Any interest or investment growth remains completely tax-free, making ISAs one of the best ways to grow your savings efficiently.

To find the best ISA interest rates, compare providers on financial comparison sites or visit your bank’s website.