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Understanding Your ISA Allowance and Fixed-Rate Accounts
Many savers are seeking clarification on how fixed-rate Individual Savings Accounts (ISAs) interact with annual tax-free savings allowances. This article addresses a common query regarding ISA rules and allowances, specifically concerning fixed-term accounts and their impact on subsequent tax years.
Reader Question: ISA Allowance and Fixed-Term Accounts
A reader opened a two-year fixed-rate cash ISA with Cynergy Bank, securing a 4.44 percent interest rate on April 5th, the final day of the 2024-25 tax year. They deposited the full £20,000 tax-free savings allowance. However, due to the two-year fixed term, withdrawals are not permitted during this period. The reader asks:
- Does utilizing the full £20,000 ISA allowance in a two-year fixed-rate ISA for the 2024-25 tax year prevent me from using the £20,000 allowance for the 2025-26 tax year?
- Can I open a new cash ISA or fixed-rate ISA for the 2025-26 tax year and deposit a further £20,000, ensuring all £40,000 remains tax-free?
- How do these rules apply in practice?
Expert Answers on ISA Allowances
Clarification from Savings Expert
Helen Kirrane, a personal finance expert from This is Money, responds: It’s commendable to maximize your ISA allowance, even at the last minute, and secure a competitive rate on a two-year fixed-rate ISA. Depositing £20,000 before the tax year ended on April 5th means you fully utilized your 2024-25 allowance. As the new tax year commenced on April 6th, 2025, a fresh £20,000 ISA allowance became available.
Crucially, using your 2024-25 allowance within a two-year fixed-rate ISA does not impact your 2025-26 allowance. The fact that the initial deposit is locked in a fixed-term account for two years is unrelated to your annual ISA allowance.
While fixed-rate savings accounts, including ISAs, typically restrict deposits and withdrawals until maturity, this restriction does not limit your ability to utilize your new annual ISA allowance. You are fully entitled to open another ISA and deposit up to £20,000 for the 2025-26 tax year.
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This new allowance can be allocated across various ISA types, such as cash ISAs and stocks and shares ISAs, provided the total deposits do not exceed £20,000 for the 2025-26 tax year. Current regulations permit opening multiple ISAs, even multiple accounts of the same type with the same provider.
As long as the funds remain within an ISA wrapper, all interest earned will be completely tax-free.
Insights from Moneyfacts Expert
Rachel Springall, a finance specialist at Moneyfacts Compare, adds: The flexibility and variety of ISA products can sometimes lead to confusion regarding annual allowances. However, the key principle is straightforward: each tax year provides a fresh £20,000 ISA allowance.
The type of ISA chosen or the duration of a fixed-rate term is irrelevant to the annual allowance itself. The allowance is determined by the total amount deposited within any ISA during a specific tax year.
Savers should monitor their total ISA contributions to remain within the annual limit. Contributing the full £20,000 to a two-year ISA for the 2024-25 tax year exhausts that year’s allowance. However, this does not preclude utilizing the £20,000 allowance for the 2025-26 tax year, which can be allocated across different ISA types.
Recent changes have introduced greater flexibility to ISAs. Individuals can now replace withdrawn funds within the same tax year, as long as they stay within the overall annual allowance. For example, if £20,000 is deposited and £10,000 is subsequently withdrawn, only £10,000 can be redeposited within that same tax year to remain within the £20,000 limit.
Importantly, any interest accrued within an ISA is tax-free and does not count towards the annual ISA allowance.
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