If you haven’t used your ISA allowance for the 2023/24 tax year, it could be wise to review your options over the next few weeks before the 2024/25 tax year starts. Read on to discover some of the reasons why an ISA could make sense for you.
Government statistics show that ISAs are a popular way to save and invest. Indeed, the latest data shows 11.8 million adult ISAs benefited from a deposit during the 2021/22 tax year. Collectively, ISA holders added around £66.9 billion to their accounts throughout the year.
The media often dubs February and March “ISA season” as savers and investors are encouraged to deposit money into their ISAs before a new tax year starts on 6 April. Some ISA providers might also offer more attractive terms during this time, such as a higher interest rate, to entice potential customers.
In the 2023/24 tax year, you can add up to £20,000 to an ISA. If you haven’t already used this allowance, here are four excellent reasons you might want to do so.
1. A Cash ISA could be a tax-efficient way to save
One of the reasons Cash ISAs make up an important part of many financial plans is that they’re tax-efficient – the interest paid on savings held in a Cash ISA is not liable for Income Tax.
Many savers have welcomed rising interest rates over the last year. Yet, it could also mean you face an unexpected tax bill.
According to the Telegraph, 2.7 million savers will pay tax on their savings in 2023/24 as a result of frozen thresholds and higher interest rates. The findings suggest that almost 1 million additional savers could face a tax bill on their savings when compared to just a year earlier.
Around 1.4 million basic-rate taxpayers are expected to pay tax on their savings this year, a figure that has quadrupled in the last four years.
If the interest your savings earn exceeds the Personal Savings Allowance (PSA), you might be liable for tax on the portion above the threshold. Your annual PSA depends on the rate of Income Tax you pay:
- Basic-rate taxpayers: £1,000
- Higher-rate taxpayers: £500
- Additional-rate taxpayers: £0
As additional-rate taxpayers don’t benefit from a PSA, an ISA could be a useful way to manage your tax bill.
Even if you’re not an additional-rate taxpayer, the amount you can hold in your savings account before you could face a tax bill might be lower than you expect.
According to MoneySavingExpert, if your savings account had an interest rate of 5.22%, assuming the account balance was constant, you might need to pay tax if your savings exceed:
- £19,158 if you are a basic-rate taxpayer
- £9,579 if you are a higher-rate taxpayer.
So, placing your savings into a Cash ISA could reduce your potential tax liability.
2. A Stocks and Shares ISA could help you invest efficiently
Similarly, Stocks and Shares ISAs could also be tax-efficient if you want to invest. The returns your investments deliver when they’re held in a Stocks and Shares ISA are free from Capital Gains Tax (CGT).
Investments held outside of a Stocks and Shares ISA could be liable for CGT if they exceed the Annual Exempt Amount, which is £6,000 in the 2023/24 tax year for individuals. You should note the Annual Exempt Amount will halve to £3,000 for the 2024/25 tax year.
The rate of CGT you pay depends on which tax band the gains fall into when added to your other income. In 2023/24:
- Higher- or additional-rate taxpayers have a CGT rate of 20% (28% for residential property)
- Basic-rate taxpayers may benefit from a lower CGT rate of 10% (18% for residential property) if the gains fall within the basic-rate Income Tax band.
According to the Financial Times, the latest HMRC figures show that a record £16.7 billion was collected through CGT in 2021/22. As the Annual Exempt Amount has fallen since then and will be cut again in 2024/25, it’s likely the amount collected through CGT will rise further.
As a result, if you’re investing, doing so through a Stocks and Shares ISA could be efficient from a tax perspective.
3. You’ll lose your ISA allowance if you don’t use it before the start of a new tax year
An ISA could reduce your potential tax liability whether you want to save or invest. So, why should you review your ISA over the coming weeks? Simply, the allowance will reset when a new tax year starts.
If you don’t use the current tax year’s allowance before 6 April 2024, you’ll lose it.
Not reviewing whether to use your ISA allowance could mean you overlook an opportunity to reduce your tax bill.
4. You could receive a government bonus with a Lifetime ISA
For some people, a Lifetime ISA (LISA) could prove a valuable way to save or invest thanks to a government bonus.
You must be aged between 18 and 39 to open a LISA, although you can continue to contribute to a LISA until you’re 50. You can deposit a maximum of £4,000 each tax year into a LISA, and can choose between a Cash LISA and a Stocks and Shares LISA.
Where a LISA is different to traditional ISAs is that deposits benefit from a 25% government bonus. So, if you deposit the annual maximum of £4,000 into a LISA, you’d receive £1,000 as a bonus.
However, if you take money out of a LISA before you’re 60 for a purpose other than buying your first home, you’ll be charged 25% of the amount withdrawn. This means you’d lose the bonus and a portion of your own deposit, equivalent to a loss of just over 6%.
Get in touch to talk about your ISA and long-term plans
If you have any questions about how to use the ISA annual allowance to support your financial plan, we’re here to help. Please contact us to arrange a meeting.
Please note:
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested.
Past performance is not a reliable indicator of future performance.
You will incur a lifetime ISA government withdrawal charge (currently 25%) if you transfer the funds to a different ISA or withdraw the funds before age 60 and you may therefore get back less than you paid into a lifetime ISA.
By saving in a lifetime ISA instead of enrolling in, or contributing to an auto-enrolment pension scheme, occupational pension scheme, or personal pension scheme:
- you may lose the benefit of contributions from your employer (if any) to that scheme; and
- your current and future entitlement to means tested benefits (if any) may be affected.
For ISAs, investors do not pay any personal tax on income or gains. Tax treatment varies according to individual circumstances and is subject to change.
Approver Quilter Financial Services Limited & Quilter Mortgage Planning Limited. 08/02/2024
