Happy New Tax Year! The 6th April not only marks the beginning of the new financial year, it also means a fresh ISA allowance for you to enjoy another 12 months of tax-efficient saving. Need help deciding how to use your new ISA allowance? Here’s some things to consider…
Use your new ISA allowance as early as possible
You can save or invest up to £20,000 without paying income or capital gains tax on your potential returns, and you have until midnight on the 5th April 2019 to use it, otherwise you’ll lose it forever. The deadline might seem a long time away now, but it could pay to start using your allowance sooner, rather than later. The sooner you put your money in an ISA, the longer it will be exposed to interest rates or potential market growth and the longer it might have to benefit from the power of compound returns. Let’s imagine you open an Investment ISA on the first day of this tax year, put £200 per month in it and receive a yearly return of 7.56%1. If you start this April, your ISA could be worth around £22,183 after 7 years. Wait until August to open and fund the same Investment ISA and your money will miss out on 4 months of being invested. That might not sound like much, but it could mean a difference of approximately £1,3202 on your overall returns by the end of the tax year in April 2025.
1: Yearly return based on FTSE 100 historic (average) returns between 31/12/2010 and 29/12/2017.
2: If you invest £200 per month from August 2018, you could get around £20,863 by April 2025.
Calculated figures are based on past performance and past performance is not a reliable indicator of future results.
Put it all in one ISA or divide it between different ISAs
There are 4 main types of ISA (Cash ISAs, Investment ISAs, Innovative Finances ISAs, and Lifetime ISAs) and you can only pay into one each of these each tax year. You can either put your full annual ISA allowance in an Investment ISA, Cash ISA, or Innovative Finance ISA, or you could divide your 2018/19 ISA allowance between a number of ISAs. For example, you could save £3,000 in a Cash ISA, £13,000 in an Investment ISA, and £4,000 in a Lifetime ISA. If you don’t know what ISAs you should open, having a look at their characteristics could help you decide.
Cash ISAs allow you to save money without paying any tax on interest you earn and can be a great way to put money aside to cover unexpected expenses.
However, if you have cash set aside to cover emergencies and you’re happy to take an element of risk in pursuit of potential long-term financial growth and inflation-beating returns, you could use an Investment ISA. With an Investment ISA (also known as a Stocks & Shares ISA), your money is invested in the stock markets and you don’t pay any capital gains tax or income tax on your returns.
An Innovative Finance ISA enables you to lend money to approved individuals and/or businesses via an online Peer-to-Peer lending platform and your borrowers commit themselves to pay you back in addition to tax-efficient interest payments.
Finally, if you’re under 40 and plan on buying your first house or want to save for your retirement, you could hold cash, investments, or a combination of both in a Lifetime ISA, which limits deposits to £4,0003 per tax year, and comes with a 25% bonus given by the government, provided you meet the various conditions.
Transfer your ISAs
Before choosing your ISAs, it’s important to have a look at what different providers offer and compare their fees and charges. If you open an ISA now but find one with cheaper costs somewhere else later this year or if you’re not happy with your returns, you can always transfer your current ISA to a new provider. Just keep in mind that it will still count towards this year’s allowance and you must transfer the full value. The start of the new tax year can also be a good opportunity to tidy up your finances, by transferring old ISAs to a single provider. Not only will you enjoy the convenience of all your money being in one place, but you could benefit from only paying one set of fees and charges. You can transfer as many old ISAs as you want to in any tax year, up to any value, and they won’t count towards your current year’s ISA allowance. But remember, you MUST use the official ISA transfer form, or they’ll lose their tax-efficient status.
The tax treatment depends on your individual circumstances and maybe subject to change in the future.
Please remember that the value of your investments can go down as well as up and you can get back less than invested.