The 5th April signals the end of the current tax year, which is also the deadline for using your tax-free ISA allowance. Here, our expert financial advisers provide a quick guide to ISAs and how to make the most of your tax-free benefits while you’ve still got time.
An ‘ISA’, or Individual Savings Account, is a tax-efficient wrapper offered under Government legislation as a way of encouraging people to save.
There are two types of ISA available – the Cash ISA and the Stocks and Shares ISA.
Currently, individuals aged 16 and over can save up to £20,000 each year into a Cash ISA without having to pay tax on it. For those aged 18 and over, you can allocate your £20,000 allowance across cash, stocks and shares, or any combination of the two. However, any unused allowance cannot be carried over to the next tax year, and so will be lost.
Generally, with ISAs, you have instant access to your savings, and you can transfer them between providers as often as you like (subject to your providers’ rules).
What to look for in a cash ISA
Cash ISAs are simply cash accounts that sit within an ISA wrapper and therefore offer certain tax advantages. The underlying account will pay a certain level of interest, so savers should shop around to ensure the rates on offer are competitive.
A high rate is not the only reason for selecting a Cash ISA. The highest rate today may not always be the best – there may be ISAs with slightly lower rates, but are consistently competitive over the long term. These might suit people who do not want to keep shifting between providers. Also, some accounts pay higher rates, but force savers to pay for those rates by making them wait up to 90 days before they can make a withdrawal.
In essence, even these seemingly simple products need some research before you commit yourself and your money.
Stocks and Shares ISAs
For savers looking beyond a Cash ISA, there are a range of investments to choose from, and a few considerations to bear in mind:
Self-select ISAs – savers select their own individual investments from a number of different choices. Choosing the right ones depends on your reasons for investing and your tolerance for risk. Investing in single shares, for example, is high risk, but can pay off.
Collective investments – a more diversified approach that provides access to many different companies or holdings. These are designed so that poor performance from one holding should not have a significant effect on the overall performance of the entire portfolio. This is often a more appropriate choice if the ISA investment constitutes a significant proportion of your overall savings.
Charges – be aware of the associated up-front and ongoing charges for the underlying investments of these ISAs. Fees will vary according to the complexity of the product and the company that manages it.
Tax considerations – while these ISAs are well known for being ‘tax-efficient’, the choice of investments can make a big difference to the level of benefit that is generated. It can be confusing, so it’s best to seek professional guidance if you’re considering a Stocks and Shares ISA.
There are a few other ISA options that you may have come across, although these have different tax-free ISA allowances and rules. It’s worth just pointing them out however so that you are fully aware of your options:
Junior ISA – the same as an adult Cash ISA, but for under 18s. The maximum tax-free allowance that can be saved into this account is currently £4,368.
Lifetime ISA (LISA) – for individuals aged 18-39. You can save up to £4,000 a year into a LISA and the Government will pay you a bonus of 25% of the amount you put in. Read more about LISAs in our earlier blog here.
Help to Buy ISA – as of 30 November 2019, these are no longer available to new savers. However, existing savers can continue to pay into their ISA, but must claim their government bonus by 1 December 2030.
Want to get the most from your tax-free ISA allowance?
ISAs enable savers and investors to build up the sums they need to meet financial goals. However, if you don’t know how ISAs work and how to use them to manage your wealth, you won’t be able to take full advantage of their benefits.
If you already have an ISA and have not yet used all of your tax-free allowance, you have until the 5th April to pay into it to avoid losing your tax-free benefit.
If you have more than £20,000 to invest, you can split the payments into your ISA to maximise this year’s allowance and next years.