Saving and investing for a future that matters. Yours.
There are many ways that you can save or invest. Individual Savings Accounts (ISAs) are an incredibly effective means of shielding your money from both Capital Gains Tax and Income Tax.
Each tax year, we are given an annual Individual Savings Account (ISA) allowance. This can build up quickly, letting you accumulate a substantial tax-efficient gain in the long-term. The ISA limit for 2020/21 is £20,000.
To utilise your ISA allowance, you should make use of it before the deadline at midnight on Monday 5 April 2021. The date marks the end of the 2020/21 tax year. It is a ‘use it or lose it’ allowance, meaning that if you don’t use all or part of it in one tax year, you cannot take that allowance over to the next year.
We’ve answered some typical questions we get asked about how to best use the ISA allowance to help make the most of the opportunities as this tax year draws to a close.
Q: What is an ISA?
A: An ISA, or Individual Savings Account, is a savings account for which you never pay any tax on the proceeds. It does come with one restriction, which is the amount of money you can save or invest in an ISA in a single tax year – also known as your annual ISA allowance. Currently, for the 2020/21 tax year, this allowance is £20,000.
Q: Can I have more than one ISA?
A: You have a total tax-efficient allowance of £20,000 for this tax year. This means that the sum of money you invest across all your ISAs this tax year (Cash ISA, Stocks & Shares ISA, Innovative Finance ISA, or any combination of the three) cannot exceed £20,000. However, it’s important to bear in mind that you have the flexibility to split your tax-efficient allowance across as many ISAs and ISA types as you wish. For example, you could invest £10,000 in a Stocks & Shares ISA and the remaining £10,000 in a Cash ISA. This is a useful option for those who want to use their investment for different purposes and over varying periods of time.
Q: When will I be able to access the money I save in an ISA?
A: You can take money out of your Cash ISA but how much, and how often, depends on which type of ISA you have. If your ISA is ‘flexible’, you can take out cash then put it back in during the same tax year without reducing your current year’s allowance. Your provider can tell you if your ISA is flexible.
Stocks & Shares ISAs and Innovative Finance ISAs don’t usually have a minimum commitment, which means you can take your money out at any point. That said, you should invest for at least five years. As such, if you’re looking to use your money within the next few years, you should probably keep it in a Cash ISA.
There are different rules for taking your money out of a Lifetime ISA.
Q: Can I take advantage of a Lifetime ISA?
A: You’re able to open a Lifetime ISA if you’re aged between 18 and 39. You can save up to £4,000 each tax year, every year until your 50th birthday. The government will pay an annual bonus of 25% (capped at £1,000 per year) on any contributions you make.
Q: What is an Innovative Finance ISA?
A: An Innovative Finance ISA allows individuals to use some or all of their annual ISA allowance to lend funds through the Peer to Peer lending market. Peer to Peer lending allows individuals and companies to borrow money directly from lenders. Your capital and interest may be at risk in an Innovative Finance ISA and your investment is not covered under the Financial Services Compensation Scheme.
Q: What is a Help to Buy ISA?
A: A Help to Buy ISA is a Government scheme designed to help you save for a mortgage deposit to buy a home. The ISA is for first-time buyers, saving to buy a property up to the value of £250,000 outside London or £450,000 inside London. The Government will add 25% to the savings, up to a maximum of £3,000 on savings of £12,000. If you pay into a Help to Buy ISA in the current tax year, you cannot also pay into another Cash ISA. The scheme closed to new accounts at midnight on 30 November 2019. If you have already opened a Help to Buy ISA (or did so before 30 November 2019), you will be able to continue saving into your account until November 2029.
Q: Is tax payable on ISA dividend income?
A: No tax is payable on dividend income. You don’t pay tax on any dividends paid inside your ISA.
Q: Is Capital Gains Tax (CGT) payable on my ISA investment gains?
A: Profits from shares held in an ISA are not subject to CGT, so any growth on your investment is all yours to keep. You cannot use losses made on your investments in your Stocks & Shares ISA to offset capital gains on your other investments.
Q: I already have ISAs with several different providers. Can I combine them?
A: Yes you can, and you won’t lose the tax-efficient ‘wrapper’ status. Many previously attractive savings accounts cease to have a good rate of interest, and naturally some Stocks & Shares ISAs don’t perform as well as investors would have hoped. Consolidating your ISAs may also substantially reduce your paperwork. We’ll be happy to talk you through the advantages and disadvantages of doing it.
Q: Can I transfer my existing ISA?
A: Yes, you can transfer an existing ISA from one provider to another at any time as long as the product terms and conditions allow it. If you want to transfer money you’ve invested in an ISA during the current tax year, you must transfer all of it. For money you invested in previous years, you can choose to transfer all or part of your savings.
Q: What happens to my ISA if die prematurely?
A: If you die, the money and investments you hold in an ISA will be passed on to your beneficiaries. After your death, your ISA will retain its tax benefits until one of the following occurs: the administration of your estate is completed or the ISA is closed by your beneficiary.
Still unsure what’s right for you?
Tax-efficiency is a key consideration when investing because it can make such an enormous difference to your wealth and quality of life. If you want to understand more about our ISA options please contact us.
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.
PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.