I read in one of your articles that if I cashed in an ISA I would lose the tax free amount forever. My question is - if I cashed in an ISA in this tax year and only used some of the money why can't I put the balance back in in the next tax year?
In short, there is nothing to stop you doing what you suggest.
This is because the ISA allowance you would lose in this scenario would be from a previous tax year, but you will still have a new allowance in the new tax year.
Each person has an ISA limit of £20,000 each tax year.
There is no reason why you could not cash in an ISA this tax year and pay any remaining balance back into a new ISA the following tax year (as long as this did not exceed £20,000).
The only stipulation would be that you cannot pay more than £20,000 into an ISA each year and this limit includes all other types of ISA in addition to cash ISAs.
The problem would occur if you were planning on paying the balance back into an existing ISA.
If it is still within the same tax year, you may be able to do this even if you had initially deposited the full £20,000 allowance – this is because some providers offer the Flexible ISA option, which means you are allowed to replace funds within the same tax year, without that replacement counting as an additional deposit.
However, even if your provider does offer this Flexible ISA option, if you replace the funds in the following tax year, that will count as a completely new subscription and therefore utilise your new allowance.
If you did not want to lose your ISA allowance, then perhaps withdraw just the amount you think you’ll need.
Of course, make sure you are aware of any penalties that may apply if you make a withdrawal, especially if it is a fixed term product
For those who simply want to improve the rate they are earning, in order to ensure their allowance is not lost, it’s important to transfer the ISA by completing an application and transfer form with your new provider – they will then move the funds for you.
For more information about the complex world of ISAs, take a look at our free ISA Guide.
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