An Individual Savings Account (ISA) is a tax-free savings account available in the UK, offering interest on deposits. Understanding how to calculate your ISA interest helps in financial planning and maximizing returns. Follow this step-by-step guide to calculate your ISA interest accurately. For more information please visit Calculate ISA Interest

Step 1: Identify the Type of ISA

ISAs come in different types, and the interest calculation depends on the type you have:

  • Cash ISA – Fixed or variable interest rates apply.
  • Stocks & Shares ISA – Interest depends on investments and dividends.
  • Lifetime ISA (LISA) – A government bonus is added to savings.
  • Innovative Finance ISA – Returns are based on peer-to-peer lending.

For this guide, we’ll focus on calculating interest for a Cash ISA.

Step 2: Know Your Interest Rate

Your bank or provider will state the interest rate, which could be:

  • Fixed-rate (remains the same for a set period).
  • Variable-rate (fluctuates based on market conditions).
  • AER (Annual Equivalent Rate) – Shows how much interest you’d earn in a year, including compounding.

Step 3: Use the Interest Formula

Interest is generally calculated using the formula:Interest=Principal×(Rate100)×Time (years)1\text{Interest} = \text{Principal} \times \left(\frac{\text{Rate}}{100}\right) \times \frac{\text{Time (years)}}{1}Interest=Principal×(100Rate​)×1Time (years)​

Where:

  • Principal = Initial deposit amount
  • Rate = Interest rate (%)
  • Time = Number of years the money stays in the account

For example, if you deposit £5,000 in a Cash ISA with a 3% interest rate (AER) for 1 year, the interest is:5000×(3100)×11=£1505000 \times \left(\frac{3}{100}\right) \times \frac{1}{1} = £1505000×(1003​)×11​=£150

Step 4: Consider Compound Interest

Many ISAs pay interest monthly or annually, affecting the total interest earned. If compounded annually, use:A=P×(1+rn)ntA = P \times \left(1 + \frac{r}{n}\right)^{nt}A=P×(1+nr​)nt

Where:

  • A = Final amount after interest
  • P = Principal
  • r = Annual interest rate (decimal form)
  • n = Number of times interest is compounded per year
  • t = Time in years

If the same £5,000 ISA at 3% AER is compounded annually:A=5000×(1+0.031)1A = 5000 \times \left(1 + \frac{0.03}{1}\right)^1A=5000×(1+10.03​)1A=5000×1.03=£5,150A = 5000 \times 1.03 = £5,150A=5000×1.03=£5,150

Total interest = £150.

If compounded monthly, adjust n = 12:A=5000×(1+0.0312)12A = 5000 \times \left(1 + \frac{0.03}{12}\right)^{12}A=5000×(1+120.03​)12A≈5000×1.03042=£5,151.75A \approx 5000 \times 1.03042 = £5,151.75A≈5000×1.03042=£5,151.75

Total interest = £151.75 (slightly higher due to monthly compounding).

Step 5: Account for Withdrawals or Deposits

If you add or withdraw money, your interest calculation will change. Banks typically use an average balance method for variable deposits.

Example:

  • You start with £5,000 at 3% AER.
  • After 6 months, you deposit £1,000, making it £6,000.

Interest for the first 6 months:5000×3100×612=£755000 \times \frac{3}{100} \times \frac{6}{12} = £755000×1003​×126​=£75

Interest for the next 6 months (on £6,000):6000×3100×612=£906000 \times \frac{3}{100} \times \frac{6}{12} = £906000×1003​×126​=£90

Total interest = £165.

Step 6: Use an Online Calculator (Optional)

If you have multiple deposits and withdrawals, online ISA calculators can help estimate your interest.

Final Thoughts

  • Higher interest rates and compounding frequency boost earnings.
  • Fixed-rate ISAs offer stability, while variable rates can fluctuate.
  • Regular deposits increase overall interest earned.

Want to maximize your ISA returns? Compare providers and consider higher-interest fixed-term ISAs!