If you haven’t used your ISA allowance for the 2023/24 tax year, it could be wise to review your options over the next few weeks before the 2024/25 tax year starts. Read on to discover some of the great benefits of an ISA account and how they can help you.

Government statistics indicate that ISAs are a widely embraced avenue for both saving and investing. The most recent data reveals that during the 2021/22 tax year, a substantial 11.8 million adult ISAs experienced deposits, with a combined total of approximately £66.9 billion added to these accounts over the year.

February and March are commonly referred to as “ISA season” by the media, as during this period, savers and investors are encouraged to make deposits into their ISAs before the commencement of the new tax year on 6 April. It is a time when some ISA providers may present more enticing terms, potentially including higher interest rates, to attract prospective customers.

In the 2023/24 tax year, you can contribute up to £20,000 to an ISA. If you haven’t already used this allowance, here are four compelling reasons why you might want to do so.

1. A Cash ISA could be a tax-efficient way to save 

Cash ISAs are a significant component of numerous financial plans due to their tax efficiency—interest earned on savings within a Cash ISA is exempt from Income Tax. Despite the positive reception among savers for the increasing interest rates in the past year, it’s important to note that this could potentially lead to an unforeseen tax liability.

As reported by The Telegraph, an estimated 2.7 million savers are anticipated to incur taxes on their savings in the 2023/24 period due to frozen thresholds and elevated interest rates. These findings indicate that nearly one million more savers may be subject to a tax bill on their savings compared to the preceding year.

Around 1.4 million basic-rate taxpayers are expected to pay tax on their savings this year, a figure that has quadrupled in the last four years. 

Should the interest accrued on your savings surpass the Personal Savings Allowance (PSA), there is a possibility of incurring tax on the portion exceeding the threshold. The annual PSA is contingent on your Income Tax rate:

  • Basic-rate taxpayers: £1,000
  • Higher-rate taxpayers: £500
  • Additional-rate taxpayers: £0

Given that additional-rate taxpayers do not enjoy the benefits of a Personal Savings Allowance (PSA), opting for an ISA could serve as a valuable strategy for effectively managing your tax liabilities.

According to MoneySavingExpert, if your savings account had an interest rate of 5.22%, assuming the account balance was constant, you might need to pay tax if your savings exceed:

  • £19,158 if you are a basic-rate taxpayer
  • £17,242 if you are a higher-rate taxpayer.

So, placing your savings into a Cash ISA could reduce your potential tax liability. 

2. A Stocks and Shares ISA could help you invest efficiently 

In a similar vein, Stocks and Shares ISAs offer tax efficiency for investors which is another one of the great benefits of an ISA. The returns generated from your investments, when held within a Stocks and Shares ISA, are exempt from Capital Gains Tax (CGT).

Investments not held within a Stocks and Shares ISA may be subject to Capital Gains Tax (CGT) if they surpass the Annual Exempt Amount, set at £6,000 for individuals in the 2023/24 tax year. It is important to be aware that the Annual Exempt Amount will decrease to £3,000 for the subsequent 2024/25 tax year.

The rate of Capital Gains Tax (CGT) you are required to pay hinges on the tax band into which the gains fall when combined with your other income. For the 2023/24 tax year:

  • Higher- or additional-rate taxpayers have a CGT rate of 20% (28% for residential property)
  • Basic-rate taxpayers may benefit from a lower CGT rate of 10% (18% for residential property) if the gains fall within the basic-rate Income Tax band.

According to the Financial Times, the latest HMRC figures show that a record £16.7 billion was collected through CGT in 2021/22. As the Annual Exempt Amount has fallen since then and will be cut again in 2024/25, it’s likely the amount collected through CGT will rise further. 

Consequently, if you are engaged in investments, opting for a Stocks and Shares ISA could prove to be an efficient choice from a tax perspective.

3. Your ISA allowance will be forfeited if left unused before the commencement of a new tax year

An ISA has the potential to diminish your tax liability, whether you aim to save or invest. Therefore, it’s crucial to reassess your ISA in the upcoming weeks because the allowance resets with the onset of a new tax year. Failing to utilise the current tax year’s allowance before April 6, 2024, results in its forfeiture.

Neglecting to review whether to use your ISA allowance may cause you to miss out on an opportunity to minimise your tax obligations.

4. You could receive a government bonus with a Lifetime ISA

For certain individuals, a Lifetime ISA (LISA) could emerge as a valuable method for saving or investing, thanks to a government bonus.

To open a LISA, you must be aged between 18 and 39, although contributions can continue until you reach the age of 50. Each tax year allows a maximum deposit of £4,000 into a LISA, and you have the option to choose between a Cash LISA and a Stocks and Shares LISA.

A distinguishing feature of a Lifetime ISA (LISA) from traditional ISAs is that deposits attract a 25% government bonus. Therefore, if you deposit the annual maximum of £4,000 into a LISA, you will receive a £1,000 bonus.

It’s important to note that withdrawing funds from a LISA before reaching the age of 60, for purposes other than buying your first home, incurs a 25% charge on the amount withdrawn. This results in the loss of both the bonus and a portion of your initial deposit, equating to a loss of slightly over 6%.

Get in touch to talk about your ISA and long-term plans

If you have any questions about how to use the ISA annual allowance to support your financial plan or are interested in learning more about any other benefits of an ISA, we’re here to help. Please get in touch with us to arrange a meeting. 

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance. 

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