How is the interest calculated on an ISA?

I realise that currently, the maximum you can invest tax-free in the current tax year is 拢3000.

I use my ISA to save for a rainy day, and have easy access to my money - e.g. saving for holidays etc.

In terms of paying money in, I know that if I pay in 拢1000, and subsequently withdraw it, I have used 拢1000 of my 拢3000 allowance.

Do they calculate the amount of interest you receive on the total amount you have paid in within the year - regardless of how much is currently in your account, or is it calculated on how much money is in your account at the time of adding the interest?

I am pretty certain that the interest is calculated over the year (or a period) rather than how much you have on the day they calculate interest. You would think yourself hard done if you had money in for 364 days of the year and got no interest because you withdrew it on the 365th. Equally, I doubt a bank would give you full interest if you had money in the account only for the one day they calculated the interest.

The calculate the interest is calculated on a daily basis, so you will get interest for the time it is in your account. So if you had 拢1000 in for a month then you would get 1 months interest at the end of the year, it has nothing to do with how much is in the account at the time the interest is added.

It depends where your money is invested and the terms of that investment. An ISA is not an investment. It is a tax free wrapper. So you invest in any ISA-elegible instrument and 'wrap' that investment into an ISA for tax purposes.

Different ISAs work in different ways and you need to read the terms and conditions of your particular one. Some for example operate a 30-90 day notice period whereby you will be penalised (through reduced interest) for withdrawing money early. The general principle though is that you will be paid at a fair rate for the amount of time that the money has been invested in the ISA 鈥?just like any savings account really.

Disclaimer:
The answers above are for guidance only and should not be acted upon without you receiving independent financial advice relevant to your circumstances. To find and IFA please call 0800 085 3250 or go to http://www.unbiased.co.uk.

Interest is due on the amount of money in the account each day. However it depends on the individual ISA as each company sets whether interest is worked out daily, monthly or annually. This makes a difference as if interest is calculated daily, the balance of your account is increasing on a daily basis (albeit it may only by a tiny amount) and tomorrow you be earning interest on the amount in your account plus the interest added today. Therefore the best calculation is a daily basis.

By the way, the maximum you can invest for the current tax year is 拢3,000 in a cash ISA but you can invest up to 拢7,000 into a stocks and shares ISA.