Anyone with money to save has been urged to make use of a generous allowance before an annual deadline that is looming. A personal finance expert has explained how people can make the most of tax-free allowances of ISAs.
However, she warned that to maximise the benefits, savers should move their cash before the deadline of April 5, 2025. She said it “disappears” after that date.
Alice Haine, personal finance analyst at wealth manager Bestinvest by Evelyn Partners, said: “Tax-free Individual Savings Accounts (ISAs), such as a Stocks & Shares ISA, allow savers to earn income, grow their wealth and withdraw investments without fear of a heavy tax bill at the end – but they come with a ‘Cinderella-style’ deadline. Either you use the allowance by tax year end at midnight on April 5 or lose it forever – and not even a stray slipper will save this lucrative window of opportunity.
“Of course, not everyone has a spare £20,000 to hand, but with the ISA clock ticking, taking advantage of as much of the allowance as you are able to, or transferring in assets held outside a tax wrapper, makes sense when you consider the savage cuts and long-term freezes to most personal tax allowances in recent years. No one wants to pay tax on money they have already been taxed on, which is why ISAs are a must-have financial accessory this tax year-end.”
Rumours of tax changes for ISA savers
Alice said: “Speculation that Chancellor Rachel Reeves may use her March spending review to make further tax changes, such as tweaking ISA rules or scrapping some products altogether, has been mounting in recent weeks. This follows calls from some city lobbyists to scrap Cash ISAs in a bid to divert more money into Stocks & Shares ISAs and investments that would benefit the wider economy. Meanwhile, the Lifetime ISA is being scrutinised by a Treasury Committee Inquiry into its suitability as a product for young people to simultaneously save for a first home and retirement.
“The outcome of the LISA inquiry is still pending and there is no clear indication of Reeves’ stance on ISA allowances yet – though several years ago she did advocate a lifetime cap. So, ISA changes may happen, or they may not. This is why savers and investors should ignore the speculation and continue to consider the ISA as their tax-efficient friend as they look to grow their savings and investments over the long term.”
Reasons to maximise your ISA allowance before the financial year ends
Your savings are protected from tax year after year
Add money to an ISA and all income and returns will be free from tax, plus the funds remain protected year after year. This tax protection is vital when you consider the sharp cuts to the annual dividend allowance and capital gains exemptions over the last two financial years, along with the hike in CGT rates in Rachel Reeves’ maiden Budget, the static Personal Savings Allowance and the longstanding freeze on income tax thresholds until at least 2028. Savers and investors are being hit from every angle, so it means they are now far more likely to pay tax on the money they have stashed away, making ISAs more important than ever.
Millions more people are set to be dragged into paying more income tax this financial year, as bumper pay rises push people’s salaries either deeper into higher tax thresholds or see them paying for the first time. That means how people save their money is key for those looking to reduce their tax burden.
Taxes that apply to savings and investments include:
The annual Capital Gains Tax exemption was halved by the previous Conservative government to just £3,000 at the start of the current tax year – that’s less than a quarter of the £12,300 it was in 2022-23. Separately, Reeves hiked the CGT rate on gains made on investments sharply to 24% for higher rate taxpayers and 18% for basic rate taxpayers (from 20% and 10% previously) in the Autumn Budget on October 30. The combination of these changes means those with assets outside of a tax-wrapper to sell will use up their CGT exemption much faster.
The tax-free dividend allowance, an annual limit, within which any dividend income is taxed at 0%, also plummeted at the start of this financial year, dropping to just £500 – that’s just a tenth of the £5,000 it was in 2016-17 tax year. How much you pay depends on your income tax band: basic rate taxpayers typically have a tax rate on dividends over the allowance of 8.75%. A higher rate taxpayer has a dividend tax rate of 33.75% and an additional rate taxpayer a rate of 39.35%. Dividends earned from shares or funds held within an ISA are not taxable, highlighting the value of holding income-generating assets within an ISA.
The Personal Savings Allowance (PSA) has been static since its introduction in 2016 with basic rate taxpayers entitled to £1,000 tax-free cash interest on savings outside of ISAs. Taxpayers subject to the higher 40% income tax rate have a £500 allowance while additional rate taxpayers earning above £125,140 subject to 45% income tax, have no concession at all. This means for every £100 in interest earned above the allowance on a regular savings account, a basic rate taxpayer would only walk away with £80 once tax is factored in. For higher rate taxpayers, it’s £60 and additional rate taxpayer it’s just £55, yet another reason why moving savings into a tax-protected ISA makes sense.
You can stash your money in investments or cash – or both
Alice said the great thing about ISAs is that the £20,000 annual allowance is very flexible and can be either saved in cash or investments. Savers can also split their allowance across different types of ISA. Those eligible can subscribe up to £4,000 into a Lifetime ISA, which then counts as part of their overall £20,000 allowance, or they can engage in peer-to-peer lending with an Innovative ISA, which allows people to lend up to £20,000 to borrowers or businesses without getting their money taxed.
Choosing the right type of ISA for your financial goal is important to ensure you are making the most of your allowance. A younger saver wanting to save for a deposit on their first home, for example, could subscribe £4,000 in a LISA (in cash or investments) to secure the maximum £1,000 annual bump up (25% of their contribution) from the Government and then spread the remaining £16,000 across a Stocks & Shares ISA or Cash ISA depending on the time horizon for their savings.
The Cash ISA has come under scrutiny in recent weeks, after city lobbyists are believed to have urged the Chancellor to scrap it in a bid to divert more money into Stocks & Shares ISAs. In a meeting with Reeves, they apparently argued that if some of the £300 billion sitting in Cash ISAs was diverted into the stock market, it would give UK PLC a much-needed boost.
This would be more beneficial to the economy than having money sitting in Cash ISAs, which offer no benefit to the Treasury as the money can earn interest-free of tax. Such reports – if true – not only suggest a move against Cash ISAs, but the reported rationale also implies restricting Stocks & Shares ISAs, at least partially, to UK equities.
Alice said this was all speculation at this stage and it may be that there are no changes to the Cash ISA. If the Cash ISA does get a facelift, perhaps a limit on the amount that can be saved into a Cash ISA would be a better solution – a scenario that was in the case until the summer of 2014.
While Investments held in a Stocks & Shares ISA have the potential to outperform cash over the long–term, delivering inflation-beating returns that outweigh the interest earned on cash, there is still a place for the Cash ISA. Scrapping the Cash ISA might make sense from a public policy perspective, as it could be an effective way to drive more people to invest in UK companies, but the beauty of the current ISA regime lies in its flexibility for the end consumer. Investing in the stock market is not suitable for everyone and investors typically need a time horizon of at least five years or more to ride out any volatility.
In addition, there may be moments when people may want to de-risk an investment portfolio for a period and hold some of their long-term savings in cash, perhaps to fulfil a short-term financial goal such as clearing a mortgage or because they are concerned markets are too expensive.
You can now have multiple ISAs of the same type
In the past, savers could only contribute to one ISA of each type per year. However, new rules that came into effect at the start of this tax year allow savers to subscribe to multiple ISAs of the same type, except for the Lifetime ISA and Junior ISA, within the same tax year.
Alice explained this was useful for investors who want to use more than one provider or have different ISAs for different financial goals. For Cash ISA savers, the rule change means they can shop around for the best deals, enabling them to open a new account if a more competitive rate crops up.
The rule change has simplified ISA saving to some extent and removed some of the confusion for consumers. In the past, some savers accidentally opened or paid into two ISAs of the same type, perhaps because they had a regular payment going into one Stocks & Shares ISA and then mistakenly paid into another.
Mistakes can still happen if people don’t track their contributions carefully. People may forget how much they have contributed to different ISAs putting them even more at risk of breaching the £20,000 allowance cap. And don’t assume the taxman won’t notice because providers must report all ISA subscriptions to HMRC after the end of the tax year.
If an oversubscription has occurred this tax year, alert your ISA provider and instruct them to remove the overpayment and amend the error. If it occurred in a previous tax year, then do not try to rectify the situation yourself. Instead wait for HMRC to contact you to advise you of the next steps or call HMRC directly for guidance.
You can move money in and out with ease
As well as being able to invest in a wide range of assets, most Stocks & Shares ISAs and easy-access Cash ISAs are ultra-flexible, Alice said. You can withdraw money and pay it back in without the fresh contribution counting towards your ISA allowance, provided the money is replaced in the same tax year.
This makes ISAs an effective savings tool for a variety of financial goals because they act like a pot you can dip into whenever needed, something that may be more useful for Cash ISAs, though don’t forget most Stocks & Shares ISAs allow people to hold cash awaiting investment.
This flexibility does not apply to LISAs, however. Withdrawals before the age of 60 or for anything other than a first property purchase for a home valued under £450,000, are subject to a 25% penalty on the full amount withdrawn.
This is why the LISA is also the subject of scrutiny with a Treasury Committee inquiry currently assessing whether it remains fit for purpose. The £450,000 cap on the value of a first home a LISA saver can use their pot for is restrictive as it has never increased and average homes in some parts of the country, particularly in London, are higher than this – something that can prevent first-time buyers from using their LISA pot for its intended purpose.
Alice said: “The withdrawal penalty – 25% of the full sum taken out – is also unfair as it not only removes the original Government bonus provided on subscription but also a portion of the saver’s own money. While it is unclear what the outcome of the review will be, solutions such as indexing the property value cap to inflation so that it moves in line with house price growth, scrapping it entirely, or reducing the penalty on withdrawals from 25% to 20% so that it does not take away people’s hard-earned savings could potentially improve outcomes for savers currently caught out by LISA rules.”
Savers can load their Stocks & Shares ISA with cash before
Those opting for an investment ISA don’t need to panic if they want to take their time to make an investment selection, Alice said. They can simply store their money initially as cash and then make their investment choices later.
Building an investment portfolio from scratch can be challenging enough without adding a ticking clock to the process as the end of the tax year edges closer. No one should feel under pressure to make hasty investment decisions that they may later regret, so securing their ISA allowance initially with cash and investing it later ensures you don’t miss out.
You can invest regularly – and reap the rewards
People don’t have to deposit lump sums to be able to invest in an ISA, after all how many have us have a spare £20,000 lying around? Instead, they can make regular contributions either on an ad hoc basis or through regular deposits – such as via a monthly Direct Debit.
This can be particularly beneficial for the risk averse, who may be reticent to invest a large sum of cash in one go in case the markets suddenly take a dive. The investor simply chooses the amount they want to invest, and the appropriate investments to invest in, aligned to their attitude to risk and their financial goals – something many people already do with their workplace pension.
Investing regularly rather than at ad hoc moments can help investors become more disciplined long-term savers, particularly those that struggle to find the time or motivation to make deposits every four weeks. Committing to a fixed sum every month, an amount that won’t leave the household budget short and won’t get touched once it is in your investment account, is an effortless way to create a savings habit that can last a lifetime.
Regular saving also removes the emotion from investing. People lead busy lives and tracking the ups and downs of a particular stock or fund can feel overwhelming or stressful for some, particularly novice investors. Investing monthly takes advantage of pound-cost averaging, so rather than investing a lump sum at a single price point – such as during a supposed dip – investors can buy smaller amounts at regular intervals no matter what the price is at the time, cushioning the effects of volatility over the short- to medium-term. It won’t necessarily deliver bigger gains – or prevent losses – but will help to smooth out returns and reduce volatility over time.
Remember, investors should typically have a time horizon of at least five years, enough time to allow their money to ride out any ups and downs in the financial markets. Financial markets, especially equities, can be subject to short-term volatility, but have historically delivered much higher real returns – that have a much better chance of beating the effects of inflation – than cash savings over the long term.
Children can also benefit from the tax perks of an ISA
While adults can save up to £20,000 per tax year, children are eligible for an ISA too – a Junior ISA (JISA) – though their allowance is capped at £9,000 every tax year. Junior ISAs are a popular way for parents and relations to build up tax-efficient savings and investments for a child. The tax benefits are the same as an adult ISA – no capital gains tax, and no further tax to pay on income – with withdrawals possible from the age of 18 when it automatically converts to an adult ISA , making the pot useful to cover university costs or a future property deposit.
Again, parents can choose to open a JISA with cash or stocks & shares – although the latter is likely to make higher returns possible over the long term. If a child receives more than £100 in interest on a regular savings account from money given to them by the parent, the parent is liable for tax on the interest above their own Personal Savings Allowance – an issue removed by opening a JISA.
Couples can double up on their ISA allowance
Alice said married couples and civil partners had a lucrative tax advantage over co-habiting couples who haven’t tied the knot – the ability to make ‘interspousal transfers’ where savings and investments can be switched to a spouse subject to lower rates to tax without triggering a tax event.
This allows the couple to make use of two sets of allowances – such as the Personal Savings Allowance, dividend allowance and CGT allowance, as well as two ISAs – to reduce the overall amount of tax exposure for the family. Transfers between spouses and civil partners are tax-free, so money earmarked for investing can be shuffled between them without flagging the interest of HMRC – particularly useful if one partner has maxed out their allowances and the other hasn’t.
So, there is the potential for a couple to save up to £40,000 in ISAs in a single tax year. Before transferring shares, funds or cash to your other half, just remember that the ISA will be in their name and they become the full, legal owner of the assets, so consider this carefully if the relationship is on rocky ground.
Don’t have upfront cash to invest?
Not everyone has pots of cash sitting around that they can move into investments, but they may have shares or funds held outside a tax wrapper in the form or share certificates, or in a General Investment Account that could benefit from being moved into a tax-free ISA.
To beat tax allowance cuts, investors can sell shares or funds and repurchase them within an ISA – a process known as ‘Bed and ISA’ – to keep future returns out of the reach of tax charges. While you may pay CGT on any realised gains above your annual allowance in the process, moving the money into an ISA means you won’t have to in the future.
Alice said: “With less than seven weeks remaining, allow enough time to complete the Bed & ISA process before the deadline. Bed & ISA deadlines typically fall several days before the end of the tax year, so starting sooner rather than later is a good idea.”