Introduced in the late 1990s, ISAs are a little gift from the UK government to encourage more people to put money aside. In total, there are four adult ISAs: Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs, and Lifetime ISAs. And what makes ISAs special is that they let you save and invest in a tax-efficient way. Put simply, with an ISA, you can put your money to work and you don’t need to pay UK tax on any profits you make. The amount you can put in an ISA is limited though. Currently, you can save or invest up to £20,000 - £4,000 of which you can put in a Lifetime ISA. This is your ISA allowance and it’s important you make the most of it. Here’s why it‘s almost always a good idea to use your ISA allowance.
So, why should you use your ISA allowance?
You get to keep more of your money
When you save or invest, you may need to pay tax on income you earn and gains you make. In other words, the government could be dipping into your savings and investments, which could eventually impact how much you get to keep at the end of your journey. With ISAs, you don’t need to pay Income Tax or Capital Tax, meaning you don’t have to sacrifice potential growth and can keep a larger portion of your pot.
If you don’t use your ISA allowance, you’ll lose it
In the current tax year, you can pay up to £20,000 in an ISA (subject to change)and every year, you have until midnight the 5th April to take full advantage of your annual ISA allowance. If you don’t use it before the end of the tax year, you’ll simply lose it as you can’t pass unused allowance to following years. More importantly, by ignoring your ISA allowance, you could be waving goodbye to potential growth and gains. So, make sure you make the most of it.
How can you use your ISA allowance?
You can split it between a number of ISA accounts
The way you use your ISA allowance is up to you. You can either put it all in one ISA, or you can split it between a number of ISAs. So if you have a £20,000 ISA allowance, how much can you put in an ISA? Well, it's up to you. You could invest the full amount in a Stocks and Shares ISA, or you could decide to put £6,000 in a Cash ISA to give your emergency fund a boost, £8,000 in a Stocks and Shares ISA for potential financial growth over the long-term, and £4,000 in a Lifetime ISA if you’re planning to buy your first home or preparing for later life. One thing to keep in mind though is that you can only open one of each ISA type, so make sure you keep track of how you’re using your allowance.
Start using your ISA allowance as soon as the tax year starts
If you’re planning on using your ISA allowance, it’s important to think strategically and plan ahead. If you wait until the end of the year to make contributions into your ISA accounts, you could be missing out on potential growth. The deadline might seem a long time away but using your annual allowance as early as possible could help you make you the most of your ISA journey. The sooner you put your money in an ISA, the longer it will be exposed to interest rates and potential market growth. And to give your money a chance to grow, you don’t necessarily need to save or invest large lump sums. If you can’t afford to put sizeable amounts of money in your ISAs, don’t worry, you could still build a decent nest egg for the future by putting small sums aside regularly.
It’s also possible to transfer your ISA allowance
If you’re disappointed with the performance of your ISA account, or just want to give your old ISAs a second lease of life, you can transfer your ISA allowance somewhere else. You can move any ISA you hold, and transfers can occur between different types of ISAs. For example, if you’re looking for long-term growth, you could choose to transfer your Cash ISA to a Stocks and Shares ISA. Investing does involve more risk than saving, however, since your returns aren’t tied to a fixed interest rate and depend on how well your investments are doing, you could potentially get higher returns in the long run.
ISA transfers are easier than you might think, but it’s important to understand the different ISA transfer rules. You can transfer as many old ISAs as you want to, up to any value, and your current ISA allowance won’t be affected by it. However, if you’re moving your current tax-year ISA to another provider, you must transfer the full balance and it’ll count towards this year’s allowance. For every ISA transfer, you must always complete an official ISA transfer form, or your account will lose its tax-efficient status.
If you need to know more about your ISA allowance then read our blog post on 5 things you need to know about your ISA allowance.
The tax treatment depends on your individual circumstances and maybe subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.