Does Interest Count Towards the ISA Limit?

This is a very common question and a sensible one. I am often asked this by people who are carefully tracking their ISA contributions and suddenly notice the balance growing beyond what they paid in. It can feel like you might be breaching the rules without realising it. The good news is that ISA interest is treated very favourably, but it is important to understand exactly how it works.

In this article, I will explain clearly whether interest counts towards the ISA limit, what does count, and how this works in practice under current UK rules.

The Short Answer

No, interest earned inside an ISA does not count towards your ISA allowance.

Only the money you actually pay into an ISA counts towards the annual ISA limit. Any interest, dividends, or investment growth generated within the ISA is completely ignored for allowance purposes.

This is one of the main reasons ISAs are so powerful from a tax planning point of view.

What the ISA Allowance Actually Measures

The ISA allowance, currently £20,000 per tax year, applies only to contributions.

That means HMRC only looks at:

• How much new money you pay into ISAs during the tax year
• Across all ISA types combined

It does not look at:

• Interest earned
• Dividends received
• Investment growth
• The total value of the ISA

From HMRC’s perspective, growth inside the ISA wrapper is unlimited and irrelevant to the allowance.

An Example to Make This Clear

If you pay £20,000 into a cash ISA during the tax year, you have used your full ISA allowance.

If that £20,000 then earns £800 in interest, your ISA balance becomes £20,800.

You have not breached the ISA limit. The £800 interest does not count towards the allowance and does not restrict future contributions in later tax years.

This applies in exactly the same way to stocks and shares ISAs where growth can be much higher.

What Does Count Towards the ISA Limit

Only new contributions count.

This includes:

• Cash you deposit into a cash ISA
• Money you invest into a stocks and shares ISA
• Payments into a lifetime ISA
• Contributions to an innovative finance ISA

Transfers between ISAs do not count towards the allowance, provided they are done correctly using the official ISA transfer process.

Interest Outside an ISA Is Different

It is worth contrasting this with interest earned outside an ISA.

Interest earned on ordinary savings accounts does count towards your taxable income, although many people are covered by the Personal Savings Allowance.

Inside an ISA, interest:

• Does not count towards the ISA allowance
• Does not count as taxable income
• Does not need to be reported to HMRC

This distinction is why ISAs are often prioritised for long term savings.

Common Areas of Confusion I See

Based on my experience, there are a few misunderstandings that come up regularly.

One is assuming that if the ISA balance goes above £20,000, something has gone wrong. It has not. That simply means the ISA has grown.

Another is worrying that interest received late in the tax year could push someone over the limit. Again, interest is irrelevant to the allowance.

I also see people hesitate to contribute because they think previous years’ growth affects the current year’s limit. It does not.

Each tax year starts fresh with a new allowance, regardless of how large your existing ISAs have become.

Does This Apply to All Types of ISA

Yes.

The rule that interest and growth do not count towards the ISA limit applies to:

• Cash ISAs
• Stocks and shares ISAs
• Lifetime ISAs
• Innovative finance ISAs

The growth is always ignored for allowance purposes.

Why This Matters in Practice

Understanding this properly gives people confidence to use ISAs without second guessing themselves.

It means you can:

• Let interest compound year after year
• Build large ISA balances over time
• Use ISAs strategically without worrying about breaching limits
• Focus only on how much new money you contribute each year

From my experience, once people grasp this point, ISAs suddenly feel much simpler and more attractive.

Key takeaways

Interest earned within an ISA does not count towards the ISA limit. Only the money you pay in counts.

This is one of the most generous features of the ISA system and a key reason why ISAs are such an effective long term tax shelter in the UK.

As long as you stay within the annual contribution limit with your deposits, you can let your ISA grow freely without tax and without worrying about interest affecting your allowance.