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 ISAs (Individual Savings Accounts) during a specific tax year – as things currently stand, the maximum you can save and/or invest in an ISA is £20,000, but this may change in the future.
In fact, the ISA allowance has already gone through a few changes over the years. Back in 2014/15, it was just £15,000, then in 2015/16, it rose to £15,240. However, the last rise was seen in 2017/18 when the ISA allowance was set to £20,000 per tax year, and it has remained at this amount going forward.
For the 23/24 tax year, the allowance will remain the same.
Why would you use your ISA allowance?
If you want to give your finances a little boost, then using your ISA allowance might help. Put simply, paying into an ISA could be a great way to save or invest tax-efficiently as you can deposit up to your ISA allowance in one ISA or spread it across the four different types that are available.
As an example, if you have a Cash ISA, then you'll be able to 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, but it is worth bearing in mind that with investing, your capital is at risk, meaning you could get back less than you put in because it's normal for financial markets to fluctuate.
How to use your ISA allowance
The way you use your ISA allowance is up to you - there's no right or wrong answer. You could 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, and as we've already explained, there are four different types available for adults in the UK. However, it’s important to know that you can only pay into one of each ISA type per tax year. This means that you’re not allowed to save in two Cash ISAs in the same tax year, but you could pay into a Cash ISA and a Stocks and Shares ISA at the same time as long as the total contributions across both types of ISA don’t exceed the ISA allowance for that tax year.
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 per year, and this 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 Investment 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 could set up each Plan with their own risk level, from Cautious to Adventurous, and compare how they perform.
When could you use your ISA allowance?
Each year, you’ve got until 11:59pm on the 5th April to take full advantage of your annual ISA allowance - and 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 is possible to transfer your old ISAs (where you've used previous ISA allowances) 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 - just remember not to 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. It isn't a goal that you have to reach. However, if you regularly save or invest money in ISAs for a number of years, then you could end up with a decent nest egg for the future.
What are the benefits of using your ISA allowance early?
We know the deadline might seem a long time away at the start of the new tax year, but by delaying your ISA journey, you could be missing out on potential growth.
Although you can use your ISA allowance whenever you want to, taking advantage of it at the start of the tax year could help maximise your returns as it will give your money more time to accrue interest (in the case of cash savings) or generate profits (if you've decided to invest instead).
But that’s not all. By starting early, your money could benefit from the power of compounding for a little bit longer, which over the long-term could make a considerable difference.
'Compounding' happens when your profits, whether it’s in the form of interest or dividends (which are payments made by the companies you invest in), are put back into your savings or investment pot. By leaving your gains and earnings in your savings or investment account, your profits could start working and depending on the environment, they might generate further profits. Over time, your money could snowball, and your pot could grow further.
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 £34,5891. However, if you wait until September to start investing this same £100 a month, you would miss out on five months of being invested, which could potentially mean missing out on gains if markets perform as expected, or even better than expected.
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 platforms, like Wealthify, that will all do the hard work for you. Simply select your risk level and let us know how much you want to invest – you could start with as little as £1 if you want to! Our team of experts will then do the rest, from building your ISA, to managing it on an ongoing basis.
Reference:
1: This is the projected value for a Confident Plan (Medium Risk Plan) with an Original theme. This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £26,537. If markets perform better, your return could be £45,463. Values correct as of 30/03/2023
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.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
