Fixed term cash ISA

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We saved for our child £25,000 over the years from a baby to 18. At 18 we wanted to make the money work better for her so put £20,000 in a fixed term fixed rate Cash ISA and the remaining £5,000 in a fixed term Saver with the same bank , same rate.They are both due to mature soon and we don’t know what to do. Can she renew the ISA with the £20,000 plus interest to a new fixed term ISA and then add the £5,000 plus interest to it? and if so will she get taxed on anything over £20,000?? I’m very confused. I understand the allowance to pay in tax free every year is £20,000 but does that mean your previous tax free savings outside of this 20,000 are taxed? The online bank chat has confused me! I thought everything in an ISA was tax free as long as you put no more than £20,000 each year but the bank seems to be saying you can only ever have £20,000 in an ISA that is free from tax and the rest you pay tax on. Am I muddled??

its £20k additional deposit per year, doesn’t include interest as that’s also included in the ISA wrapper.

Unless it changes in the budget she transfers the ISA to one that gives a good rate and if the first ISA was set up before this year she can put the money from the fixed term saver into a new ISA.

Some people have a lot of money in different ISAs, you can currently put in £20,000 a year.

Can she renew the ISA with the £20,000 plus interest to a new fixed term ISA

That will depend on the providers rules. It is likely that it can be transferred into another Fixed Term ISA and not count as new money going in as it is already Inside the ISA wrapper.

Then add the £5,000 plus interest to it?

Yes, that would be new money going in to the ISA wrapper this tax year. A fixed term ISA likely has rules about when payments can go in, such as during first 30 days of opening the account.

Will she get taxed on anything over £20,000?

Generally I will say no. If the money is all inside ISA wrapper, then what is inside is tax free. Interest on the £5k that was outside the ISA would be subject to tax in the tax year that the interest was paid. So it might have spread the interest payments over last tax year and this tax year. Likely to be no tax on it, as there is a Personal Savings Allowance.

The bank seems to be saying you can only ever have £20,000 in an ISA that is free from tax and the rest you pay tax on.

That sounds wrong. The ISA allowance applies to new money going in to ISA (and LISA) in the tax year. Money already in an ISA which is from a previous tax year, is not new money going in.

Think about:
What is the money for? If some will be used towards a first home purchase, then consider using a Lifetime ISA (max £4k can be paid in during a tax year).
When will they need access to the money? Is locking it away sensible? If it will not be accessed for over 5 years, then could it be invested?

One issue with Fixed Term Cash ISA is that providers don't always accept a Transfer IN. So read the account terms carefully.

Thanks all. She actually got a letter each for both accounts and can renew them both for another year with a new slightly less but same for both interest rate. I think she is just going to do that as she won’t exceed her personal tax allowance. Thanks also for clarifying the ISA issue about the £20,000 allowance. I didn’t think what the chat box said seemed correct. I have looked at the lifetime ISA but I think there are restrictions which mean it’s not quite as good a deal as it first sounds.

Even if she wont exceed her personal allowance this year there may be tax advantages in future years and ISAs could be abolished or tax protection reduced in the autumn budget. With a fixed rate the interest is often added on at the end so could all fall in the next tax year. If she may pay tax next year and not this she could opt for monthly interest added to the account.