The end of the tax year is a timely reminder to get your finances in order and make best use of the available tax breaks and allowances. And one brilliant way of protecting your money from the taxman is an Individual Savings Account, most commonly referred to as an ISA.
To put it simply, an ISA shelters your money from further liability to Income Tax or Capital Gains Tax, and is therefore a straight-forward, flexible and tax-efficient way to grow your wealth over time. Unsurprisingly, ISAs have proved extremely popular since their introduction over two decades ago –over 21 million people have one and the total value held is over £608 billion.1
But, regardless of their inherent simplicity, there are ways in which we can make our ISAs work better for us – and the end of the tax year is therefore the perfect opportunity to review your portfolio and your available allowances.
Here are three things to think about:
Your allowance: use it or lose it!
The annual ISA allowance of £20,000 is a valuable opportunity to protect your well-earned money from any further liability to Income Tax or Capital Gains Tax. Not only that – doubling up between a couple represents an even more significant tax-saving opportunity, being able to shelter up to £40,000 in total.
It’s not possible to carry over any unused allowance from year to year, so it’s important to use as much of this annual ISA allowance as possible before the end of the current financial year on 5 April. Given that the average ISA subscription (2017-8 tax year) is just over £6,409, there is clearly the opportunity for many savers to make more of their annual tax break.
Invest for long-term success
Aside from making the most of your allowance, this is also an ideal time to review whether your ISA portfolio meets your needs: present and future.
Cash ISAs and Stocks & Shares ISAs are the main options for your allowance. Four out of five ISA subscriptions since 1999 have been in Cash ISAs, with over £270 billion is deposited – showing our preference for cash.2 What’s notable though is that this represents only 44% of the total market value of ISAs.3 Stocks & Shares ISAs have therefore proven their ability to grow investors’ wealth more successfully over the longer term.
With the ability to earn tax-free interest of up to £1,000 on savings in a standard bank account*, perhaps savers should therefore be thinking longer term with their ISA allowance?
If you’re worried about investing a lump sum into a Stocks & Shares ISA, it’s worth considering drip-feeding your investment through a regular savings plan to give you more peace of mind. It’s a tried and trusted way to help control risk over the longer term, encouraging you to invest no matter what the market is doing.
If you already have a Stocks & Shares ISA portfolio, you should review it regularly, and the end of the tax year is as good a time as any. Ask yourself: Does your portfolio still match your attitude to risk or current needs? Could you improve the income-generating potential of your ISA portfolio? Would you like to consolidate your ISA investments into one convenient and easily managed portfolio? At Wellesley Wealth Advisory, we can help with this ‘ISA audit’.
*This means a basic rate taxpayer could earn tax-free interest on savings of up to £183,000 (based on the current average easy access rate).4 That’s an unnecessarily comfortable tax-free emergency pot for most people!
The next generation of savers
Given the future financial challenges faced by the children of today, why not consider giving them a head start by investing into a Junior ISA? The allowance for each child in this tax year is £4,368 and, while it must be set up by a parent or guardian, anyone can pay money in.
A Junior ISA is the perfect opportunity for anyone wishing to pass on wealth intact to the next generation while minimising the potential impact of Inheritance Tax. Latest figures show that 907,000 Junior ISA accounts were subscribed to in 2017-18 around £902 million was invested.5 What’s more – there is also an opportunity to put away up to £24,368 tax-free in your child’s name this tax year. 16- and 17-year-olds are able to open a Junior ISA and an adult Cash ISA (not Stocks & Shares).6
Take control of your ISA plans
As we have seen, now is the perfect time to make the most of your tax allowances – specifically the ISA. Remember, you cannot carry forward your ISA allowance, so this year’s will be lost if it is not used by 5 April.
If you have a question about ISAs, Junior ISAs or tax planning, or you would like more information about my services, please contact me on 01444 244551 or via email at email@example.com.
1,2,3,5,6 HMRC, Individual Savings Account (ISA) Statistics, April 2019
4 Moneyfacts, January 2020