The 6th April marks the start of a new tax year and with it comes a new ISA allowance for eligible UK residents. The one thing the 2021 UK Budget warned us is that tax rises in the coming years are inevitable as the economy steers its way out of the Covid pandemic. What we don’t know is where those tax cuts will fall, which is why more people are actively using and securing their ISA tax efficient allowance while they have it.
An ISA is the shortened name for Individual Savings Account, which is a savings and investment account that pays tax-free interest payments. It is one of the few tax relief incentives offered by the Government to UK residents, so it is a valuable part of many peoples financial plans.
UK residents get an ISA allowance for each tax year, and for the 2021/22 tax year it is £20,000. This is the maximum amount you can save in a tax-free cash or investment ISA.
Why are ISAs important to High Rate Tax Payers?
You do not pay tax on interest paid on cash savings, or income or capital gains from investments when the money is held in an ISA account. Other types of savings or investment don’t offer this tax relief, so you have to pay tax on gains or interest you receive, and for high rate taxpayers, this is at a rate of up to 45%.
Using the ISA allowance available each year can enable high rate taxpayers to build significant sums of money tax efficiently. Some people use ISAs as a flexible way to save for retirement alongside their pension: as the years pass by, they find that they hold several hundreds of thousands in tax-efficient ISAs. Some people have managed to become ISA millionaires by investing their full tax-efficient ISA every year. You can move money you hold in other taxable investments into an ISA wrapper, and this is often referred to as ‘bed and ISA’ transaction. It simply moves existing money from your Investment Account by selling a number of units and then repurchasing them into your ISA.
What are my ISA account options?
There are 4 types of ISAs available to adults:
Cash ISA, which is used to hold cash savings.
Stocks and shares ISA, which can include shares in companies, unit trusts and investment funds, corporate bonds, government bonds.
Innovative finance ISA, these can include peer-to-peer loans – loans that you give to other people or businesses without using a bank or ‘crowdfunding debentures’ – investing in a business by buying its debt.
Lifetime ISA, you must be 18 or over but under 40 to open a Lifetime ISA. The aim of this account is to help you save for your first home or retirement. You can put in up to £4,000 each year, until you are 50 and the government will add a 25% bonus to your savings, up to a maximum of £1,000 per year. Lifetime ISAs can include stocks and shares.
If you have loved ones or children in your life then you can invest or save into a Junior ISA on their behalf. Whilst children typically don’t pay tax on savings or investments, the tax efficient wrapper of the ISA will continue after the child turns 18.
You can open more than one type of ISA in any tax year, so you can put money into a cash ISA as well as a stocks and shares ISA. But you must not exceed your total allowance of saving or investing more than £20,000.
Can I change the investments or provider holding my ISA?
You can move or transfer your cash savings or investments to a new provider at any time and retain the tax efficient ISA wrapper in which that money is held. You can also switch the money between cash and investment holdings. When you move money between accounts you should use the ISA transfer process, and not withdraw and reinvest the cash. If you withdraw the money without doing this, you will not be able to reinvest that part of your tax-free allowance again.
If you have a flexible ISA, then the transfer rule may not apply. 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 or not. Lifetime ISAs do not allow you to withdraw money at any time, and have different rules.
Interest rates offered on cash savings are low at the moment, and because of that many more people may be considering moving their money into a stocks and shares ISA. Whilst this does offer the potential for higher returns over the long term, stock and shares investments carry higher risks and the value of your investments can go down as well as up, so you may get back less than you originally invested.
It is worth remembering that ISAs were introduced in 1999 and you may be one of the many people that have investments which have been held for a very long time. It may be of benefit to review these ISA accounts to ensure they are on track to help you with your future financial plans, and if money is invested to ensure funds are still in line with how comfortable you are with taking investment risk.
If you would like to find out more about using your ISA allowance for this current tax year, or would like to review your investment portfolio, call Fuladvice on 0808 501 5093 or email info@fuladvice.co.uk.