A Cash ISA (Individual Savings Account) is a tax-efficient way to save money in the UK, as interest earned within the account is tax-free. Understanding how interest accumulates on your Cash ISA can help you maximize your savings. For more information please visit Calculate ISA Interest
How Interest Is Calculated on a Cash ISA
The interest on a Cash ISA is typically calculated using one of the following methods:
- Simple Interest – Calculated only on the initial deposit.
- Compound Interest – Calculated on both the initial deposit and the accumulated interest.
Most ISAs offer compound interest, meaning your money grows faster over time.
Example of Compound Interest Growth
Let’s assume:
- You deposit £10,000 in a Cash ISA.
- The annual interest rate is 3.5%.
- Interest compounds annually.
Using the compound interest formula:A=P(1+r/n)ntA = P(1 + r/n)^{nt}A=P(1+r/n)nt
Where:
- AAA = Final amount after interest
- PPP = Initial deposit (£10,000)
- rrr = Annual interest rate (0.035)
- nnn = Number of times interest is applied per year (1 for annual compounding)
- ttt = Number of years
Yearly Growth Calculation
| Year | Interest Earned | Total Balance |
|---|---|---|
| 1 | £350 | £10,350 |
| 2 | £362.25 | £10,712.25 |
| 3 | £374.93 | £11,087.18 |
| 5 | £416.90 | £11,914.89 |
| 10 | £493.48 | £14,103.08 |
After 10 years, your savings will have grown to £14,103.08.
Maximizing Your ISA Growth
- Shop around for the best rates – Different providers offer varying interest rates.
- Consider fixed-rate ISAs – These often have higher interest but require locking your money in.
- Use your full annual ISA allowance – The 2024/25 allowance is £20,000.
- Reinvest interest (if applicable) – Some ISAs allow reinvestment for faster growth.
Would you like help calculating returns for a specific scenario?
