As soon as the new tax year starts, your ISA allowance will reset. But do you know how and when to use it? If you haven’t really thought about it, here’s a quick guide to answer your questions and help you make the most of your ISA allowance.
What is your ISA allowance?
Your ISA allowance is the total amount you can put in your ISA during a specific tax year – as things currently stand, the maximum you can save or invest in an ISA is £20,000, but it may change in the future. In fact, it’s already gone through many changes. Back in 2014/15, the ISA allowance was £15,000, then in 2015/16, it rose to £15,240. The last rise was seen in 2017/18 as the ISA allowance was set to £20,000 per tax year.
Why use your ISA allowance?
If you want to give your finances a little boost, then using your ISA allowance could help. Put very simply, paying into an ISA is a great way to save or invest tax-efficiently. If you have a Cash ISA, you can earn tax-free interest on your savings. With a Stocks and Shares ISA, your money is invested in the stock market and you don’t need to pay tax on any returns you make, meaning you get to keep more of your potential gains. If anything, using your ISA allowance will help your money work a bit harder.
How to use your ISA allowance
The way you use your ISA allowance is up to you. You can either put everything into one ISA or split your total allowance between a number of different ISA accounts – yes, you’re allowed to have more than one type of ISA, however, it’s important to know that you can only pay into one of each ISA type per tax year. This means you’re not allowed to save in two Cash ISAs in the same tax year, but you can pay into a Cash ISA and a Stocks and Shares ISA as long as the total contributions don’t exceed £20,000. You could also split your ISA allowance further if you happen to have an Innovative Finance ISA or a Lifetime ISA – for the latter, the total amount you can put is £4,000 and it counts towards your full ISA allowance. And although you can’t have more than one Stocks and Shares ISA in the same tax year, with Wealthify, you can open several plans within your ISA, which can be very handy if you’ve got many different goals you want to save for. Another great thing about this is that you can set up each plan with their own risk level, from Cautious to Adventurous.
When can you use your ISA allowance?
Each year, you’ve got until midnight on the 5th April to take full advantage of your ISA allowance. If you don’t use it before the end of the tax year, then you’ll lose it forever as you can’t carry over any unused allowances into the following years. However, it’s possible to transfer your old ISAs (and used ISA allowance) from one provider to another without it impacting your savings. All you need to do is contact your new provider and complete the official ISA transfer form to retain the tax benefits attached to your account – do not withdraw any money during the transfer process or your ISA will lose its tax-efficient status.
Obviously, not everybody is able to save or invest £20,000 a year, and that’s absolutely fine. However, if you want to take control of your finances, it could be worth putting whatever you can afford aside, even small sums. And if you do it on a regular basis for a number of years, you could end up with a decent nest egg for the future.
What are the benefits of using your ISA allowance early?
You can use your ISA allowance whenever you want to but using it at the start of the tax year could help maximise your returns. We know the deadline might seem a long time away but by delaying your ISA journey, you could miss out on potential growth. However, the sooner you put your money into an ISA, the longer it will be exposed to interest rates and potential market growth, if you’re investing. But that’s not all, by starting early, your money could benefit from the power of compounding a little bit longer, which over the long-term could make a huge difference.
Compounding happens when your profits, whether it’s interest or dividends (payments made by companies you invest in), are put back into your pot. By leaving your gains and earnings in your savings or investment account, your profits can start working and depending on the environment, they could generate further profits. Over time, your money could snowball, and your pot could grow exponentially.
Say you open a Stocks and Shares ISA and start paying into it on the very first day of the new tax year. You put £100 every month and leave it alone for 20 years. After two decades, your pot could be worth £34,5621. However, if you wait until September to start investing £100 a month, you would miss out on five months of being invested, which could potentially mean missing out on gains. So, if you can afford it, it could be wise to start your ISA journey now.
Setting up an ISA may sound like a daunting task, but it doesn’t have to be. If you want to invest in a Stocks and Shares ISA, there are many online platforms, like Wealthify, that will do the hard work for you. Simply select your risk level and let us know how much you want to invest – you can start with as little as £1. Then, our team of experts will do the rest, from building your ISA to managing it on an ongoing basis.
1: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £26,518. If markets perform better, your return could be £45,425. Values correct as of 09/12/2020
The tax treatment depends on your individual circumstances and may be 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.