10 tips to help maximise ISA allowances this tax year

Tax-free Individual Savings Accounts (ISAs) are the must-have financial accessory of the moment. That’s because all income and capital gains held in an ISA are tax-free.

A wake up call for savers and investors

Cuts to the annual dividend allowance and capital gains exemptions at the start of the current tax year – with both set to halve again from April 6 – have been a wake-up call for savers and investors. Add in the personal savings allowance, which remains frozen at £1,000 for basic taxpayers, £500 for higher rate taxpayers and £0 for additional rate taxpayers and this means savers and investors are far more likely to pay tax on the money they have carefully stashed away, making ISAs more important than ever. 

Of course, relatively few savers will be able to afford to fully take advantage of their existing £20,000 ISA entitlement but there are many reasons to maximise as much of your allowance as possible before this financial year ends. Here are 10 tips to help you act now:

1. Your savings are protected from tax

All income and capital gains are free from tax and remain protected from tax year after year. Since ISAs were first introduced almost 25 years ago, increasing numbers of people have become ISA millionaires simply by maximising their allowance in full every tax year and leaving their money invested. But remember, the value of investments can go down and the tax treatment of ISAs may change in the future.

Maximising tax exemptions is key when you consider most personal tax allowances have been shoved into the deep freeze until 2028 and the UK tax burden has reached a post-war high. 

With 1.4 million more people set to be dragged into the higher 40% tax band this year (and 0.3 million more people dragged into the 45% tax band)¹, how you save your money is a game-changer for those looking to reduce their tax bill.

It’s important to remember prevailing tax rates and reliefs depend on individual circumstances and may be subject to change in the future.  

Capital gains tax exemption

• The capital gains tax (CGT) exemption was halved from £12,300 to £6,000 at the start of the current tax year and will halve again from 6 April to just £3,000
• Those with assets in taxable accounts will use up their CGT exemption much faster
• The capital gains tax rate for investments such as shares is 10% or 20%, depending on your tax position, which is why holding funds in a tax-protected ISA makes sense

Dividend allowances

• The dividend allowance dropped from £2,000 to £1,000 at the start of this tax year and is set to halve again to just £500 from 6 April
• When dividend income exceeds the allowance, you are liable for tax at your marginal rate
• A taxpayer on the basic rate will typically have a tax rate on dividends over the allowance of 8.75%, while a higher rate taxpayer will have a dividend tax rate of 33.75% and an additional rate taxpayer a rate of 39.35%
• Dividends earned from shares held within an ISA are not taxable; this highlights the value of holding income-generating assets within an ISA

Personal savings allowance

• Basic rate taxpayers are entitled to £1,000 tax-free cash interest on savings outside of ISAs with those paying the higher 40% income tax rate awarded a £500 allowance, and additional rate taxpayers have no personal savings allowance at all
• The number of people in the latter category will increase significantly this year, because the Chancellor reduced the threshold for paying the additional rate from £150,000 to £125,140 last April
• For every £100 in interest earned above the Personal Savings Allowance on a standard savings account, a basic rate taxpayer would only walk away with £80
• For higher rate taxpayers, £100 in interest would leave them with just £60 once tax is deducted, while a higher rate taxpayer would only get £55, which is why moving cash savings into a tax-protected ISA makes sense

Those with more attractive savings rates might find themselves paying tax on a much lower level of savings than anticipated, while some savers may not realise they could be liable for tax – remember to check the kids’ savings too.

2. You can have different ISAs for different financial goals

Choosing the right type of ISA to suit your financial goals can help ensure you are making the most of your allowance.

A new ‘British ISA’ was announced at the recent Spring Budget, and is intended to encourage investment in UK companies, with an additional £5,000 allowance to incentivise investors. A launch date for the new British ISA has not been announced yet.

Adults currently have four different types of ISA to choose from: 

1. Cash ISA	2. Stocks and Shares ISA
Suits those with a short-term time horizon, who are risk averse and may need access to their money in the next five years	Suits investors with longer time horizons and able to accept more risk as the value can go down and you can lose money
An easy-access savings option for additional rate taxpayers who have no personal savings allowance	DIY investors can choose their own investments, spending time selecting assets that match their attitude to risk and monitoring the performance of their portfolio themselves
	Or they can choose to invest in a fully managed portfolio, sometimes referred to as a Ready-made Portfolio. Many investment platforms offer these off-the-peg investment portfolios where a portfolio manager will build a diverse portfolio of assets, typically tailored to different levels of risk and then periodically adjust and rebalance the mix
3. Lifetime ISA (LiSA)	4. Innovative ISA (FISA)
Can be held in cash or stocks and shares	Allows peer-to-peer lending up to £20,000 tax-free to borrowers or businesses
For people between the ages of 18 and 40. Once the ISA is open, you can continue contributing to it until you are 50	From 6 April this year, IFISAs are allowed to include long-term asset funds and open-ended property funds
Designed to help purchase first home (up to £450,000) or save towards retirement	IFISAs are considered higher risk because your money is in peer-to-peer investments
Savers can contribute up to £4,000 a year, with the Government topping up by 25% - that’s a free money bonus of up to £1,000 a year	Remember, these invest in illiquid assets and could be difficult to sell quickly
Withdrawals for purposes other than first home or retirement savings will incur a 25% withdrawal charge so you could end up getting back less than you put in	As IFISAs are not protected by the Financial Services Compensation Scheme, you could lose your money or find it hard to get back from a company that goes bust

Go deeper – learn more about the different types of ISAs and how they can work for you.

3. You can stash your money in cash or stocks & shares – or both

A great feature about ISAs is that the £20,000 allowance applies across all types so you can save your money in cash or as investments, or both, and split the money across different ISAs. A saver could store a portion of their savings in the highest-interest cash ISA they can find and, if they can accept the higher risk, deposit the rest in an investment ISA to take advantage of potential longer-term returns.    

4. Some ISAs are flexible – you can move money without busting your allowance

Investment ISAs and easy-access cash ISAs allow you to 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.  

ISAs are an effective savings tool for short and long-term financial goals because they act like a pot you can dip into when needed. Don’t forget a stocks and shares ISA can hold cash as well as investments, so your money is protected from tax while you consider where you would like to invest long-term.

5. Savers can load their investment ISA with cash before tax year end and invest later

Those opting for a stocks and shares ISA don’t need to panic if they need more time to make an investment selection. They can simply store their money initially as cash and then make their investment choices later. 

No one should feel under pressure to make hasty investment decisions that they may later regret; securing an ISA allowance initially with cash and investing it later ensures you don’t miss out. 

Some platforms pay interest on cash balances – Bestinvest cash savers get 3.95% (as at November 2024 and subject to change) on cash within their Stocks & Shares ISA – so your money won’t sit idle while you select your investments.

6. You can invest regularly and reap the benefits of compounding

People don’t have to deposit lump sums to be able to invest in an ISA, they can make regular contributions either on an ad hoc basis or through regular deposits – such as on a monthly or quarterly basis. 

Investing on a monthly or quarterly basis takes advantage of pound-cost averaging, so rather than investing a lump sum at a single price point – such as during a supposed dip or when markets are soaring, and optimism is high – investors can buy smaller amounts at regular intervals no matter what the price is at the time. This could cushion some of the effects of volatility in the short- and medium-term. 

A simple way to do this is to set up regular savings. Someone wanting to maximise their ISA allowance in full could set up a monthly direct debit of £1,666, which adds up to just under £20,000 over the course of 12 months.  

7. ISAs are family-friendly – with a tax-free allowance of £58,000 for a family of four

While adults can save up to £20,000 per tax year, children can save up to £9,000 into a Junior ISA every tax year. For a family of four that equates to a tax-free allowance of £58,000 a tax year. 

Junior ISA tax benefits are the same as adult ISAs – no capital gains tax, and no further tax to pay on income. Parents can choose between a Junior stocks and shares or cash ISA – although the former may make higher returns over the long term but they do put the money at a higher risk for loss.

If a child receives more than £100 in interest on a regular savings account, the parent is liable for tax on the interest above their own personal savings allowance – this issue is removed by opening a Junior ISA. 

Go deeper – understand more about investment Junior ISAs.

8. Married couples can share ISA allowances between them

Married couples and civil partners have a lucrative tax advantage over co-habiting couples who haven’t tied the knot – the ability to make ‘interspousal transfers’. This is where savings and investments can be switched between spouses without triggering a tax bill. 

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.

This is particularly useful if one partner has maxed out their allowances and the other hasn’t; there is the potential for a couple to save up to £40,000 in a single tax year. But 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.

9. Don’t have cash upfront to invest? You can transfer other investments using ‘Bed and ISA’ 

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 of 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 capital gains tax on any realised gains above your CGT annual allowance, moving the money into an ISA means you won't have to in the future. Remember, the value may fluctuate while they are out of the market so they wouldn’t benefit from any rise in value (nor would they be affected by any fall).

Give yourself enough time to complete the Bed and ISA process as the deadline typically falls several days before the end of the tax year. 

10. Whatever you do – don’t wait until the last minute to open or top up an ISA

To give you an idea of how late some people leave it, Bestinvest’s final ISA investment of the 2022/23 tax year came in at 11.55pm on 5 April 2023. However, it’s important to remember your online provider may need time to process your application or add the funds so it may not be possible to process it in time if left this late.

To successfully subscribe to an ISA by the deadline you will need to do three things:

1. Have a UK personal bank account in the name of the applicant to hand
2. Make the payment using a debit card (a credit card often won’t be accepted)
3. Have your National Insurance number handy

Some people also like to get ahead on the new tax year. The first contribution to a Bestinvest ISA in the new 2023/24 tax year arrived at 5.32am on 6 April 2023. 

And it’s never too early to max out your new ISA allowance at the start of the next tax year – the first Bestinvest account holder to max out their full £20,000 allowance this tax year carried out the transaction at 6.58am on 6 April 2023.

How Bestinvest can help ISA investors before tax year ends

At Bestinvest you can manage your own investments with as much expert support as you like. Our cost-effective Stocks & Shares ISA and Junior Stocks & Shares ISA gives you access to our huge range of quality investments. Our tiered service fees are capped at 0.4% a year and online share dealing is just £4.95 a trade.

If you would rather have your investments managed by experts, you can do that too. Our range of Ready-made Portfolios are built by experts at our parent company, Evelyn Partners, one of the UK’s largest wealth management firms. They look after more than £59 billion of people’s money. And you won’t pay more than 0.2% in service fees.

It’s easy for investors to stay on track with free resources including our Top ISA investment ideas guide and digital tools such as our ISA calculator and our simulator, Grow my money, that shows how investing could help you reach your goals.

And if you’re looking for on how to get started or how you can rejuvenate your portfolio, you can arrange free coaching with a qualified financial planner with no ongoing commitment. Investors keen for bespoke advice can choose one of our low-cost bite-sized investment advice packages.  

Remember at Bestinvest we pay up to £500 towards your exit fees when you transfer (see our terms and conditions). Investors may find it easier to manage and review investments in one place. You could save money on provider fees too.

Open an ISA              Open a Junior ISA           

Transfer an ISA         Transfer a Junior ISA

Source

¹ According to the Office for Budget Responsibility, as at March 2024