Use it or lose it: the approaching annual ISA deadline

If you’re looking to invest tax efficiently, and if you don’t already have one, then an ISA could be for you. For each of the last 25 years, millions of people have invested tens of billions into these simple and effective accounts. But the deadline for 2023/24 ISAs runs out in a matter of days. We explain all below.

The ISA man cometh

Every tax year the government allows you to invest up to £20,000, tax free, in an individual savings account – known as an ISA.

The tax breaks are generous: no income or capital gains tax levied on money held within an ISA.

The best way to think of an ISA is as a wrapper. You have your investments (or savings) and then you buy them or place them inside the ISA, which insulates them from tax.

The deadline to use (or lose) this allowance is 5 April, the end of the tax year. The new tax year brings with it a new annual allowance of £20,000, and so on. This means there are just days left to use this year’s allowance, if you haven’t already done so.

One name, many types

These are popular investments. In 2021/22, people opened nearly 12m accounts, investing or saving almost £67bn.

Over half of this money, some £34bn, went into stocks and shares ISAs.

This is one of four different types of ISA. You can use it for investment funds, shares in companies, corporate bonds and government bonds.

At First Wealth, stocks and shares ISAs are the main one we’d expect to talk to our clients about. It’s flexible, it’s large (that £20,000 limit is pretty handy every tax year) and it’s accessible, because you can withdraw money any time you need it.

Stocks and shares ISAs are joined by three other types of ISA, all with specific rules.

• Cash ISAs are wrapped around bank and building society cash accounts. In some cases, you can also include National Savings and Investments products.
• Lifetime ISAs are designed to help prospective homebuyers save for a property purchase. Unlike the other types, you can only invest £4,000 per tax year, you must be aged 18-40 to start it and you can’t invest if you’re over 50. You can use it to wrap cash or the same sort of investments as stocks and shares ISAs.
• Innovative finance ISAs are for peer-to-peer loans or types of lending called ‘crowdfunding debentures’, where you invest in a business by buying its debt.

There’s also a junior ISA, where you buy one for a child under 18, but we’ll come onto that in a moment.

The recent Spring Budget included news that there’ll soon be a new UK ISA. This will mean you can shield an extra £5,000 from tax in UK-focused investments. It’s not available yet but when the products arrive they’ll no doubt be a valuable addition to your tax efficient toolbox.

You can currently invest up to £20,000 in one type of ISA (or £4,000 in the lifetime ISA) or spread this same sum across multiple types.

To ISA or not to ISA

Over the years the government has increased this sum – at launch in 1999, it was a mere £7,000 – although there’s no suggestion further increases are coming.

But there is a suggestion – by the Institute of Fiscal Studies – that recent legislation and changes to the tax system are actually a constituting a tax increase in real terms for many people.

Of course, we have no idea what tax policies or changes will come with the current or any future government. All we know is that ISAs represent a terrific opportunity to insulate wealth from the tax man.

If you’re fortunate enough to afford some or all the full ISA allowance every tax year, we would almost always recommend doing so. ISAs – alongside pensions – are an essential building block in building and preserving your wealth.

How to use your ISA allowance

There are a few ways you can use the ISA allowance.

The first is simply to talk to one of our advisers and ensure any new money you want to shield from tax is invested before the midnight deadline on Friday 5 April 2024.

They may also ask if you want to buy a new ISA from Monday 8 April. After all, if tax efficiency is front of mind, why not be early in the new tax year and then not worry about it for some time?

If you have existing investments outside an ISA’s tax-efficient embrace, a bed-and-ISA might be for you. This unlikely sounding tactic simply means you sell your current investments and then immediately buy the same investments back within your ISA.

This can open you up to capital gains tax as you sell (the 2023/24 limit is £6,000) and you also need to stick within the £20,000 limit. But it’s a handy approach.

You can also take an ISA out in the name of your spouse or civil partner. Suddenly, £20,000 becomes £40,000. And should they die, you can also inherit their ISA allowance.

Junior ISAs are another handy way of saving within the family. You can allocate an additional £9,000 a tax year for each child under 18 and living in the UK. These come in cash and stocks and shares varieties – like adult ISAs above – and the money is theirs.

There’s often plenty to think about as the tax year-end deadline approaches. If ISAs are on your list – or if you’d like to know more about what might be appropriate for you – then please get in touch on hello@firstwealth.co.uk or call 020 7467 2700.

[1] https://www.gov.uk/government/statistics/annual-savings-statistics-2023/commentary-for-annual-savings-statistics-june-2023

[2] https://www.gov.uk/individual-savings-accounts/how-isas-work

[3] https://ifs.org.uk/articles/personal-taxes-are-rising-despite-nics-cut#:~:text=This%20year%2C%202024%2C%20will%20see,effect%20will%20vary%20across%20people.

[4] https://www.gov.uk/individual-savings-accounts/inheriting-an-isa-from-your-spouse-civil-partner#:~:text=If%20your%20spouse%20or%20civil,their%20ISA%20when%20it%27s%20closed

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.