The individual Savings Account ( ISA ) is a popular tax-efficient savings and investment vehicle in the United Kingdom. It is important to start planning how you intend to use your ISA allowance before the tax year ends on the 5th of April because if you don’t use it, you’ll lose it forever.

Make sure you take advantage of the ISA Allowance each year as it offers a range of benefits for you as a  saver and investor. By saving and investing up to a certain amount each year, without having to pay any tax on the interest, dividends, or capital gains you earn it means that you can keep more of the returns you make on your investment which will reduce the impact of taxation on your savings and investments.

Furthermore, your ISAs can benefit you with their flexibility. You can split your ISA allowance between different types of ISAs, or you can use your entire allowance on one type of ISA, the choice is completely yours to make. In addition to its flexibility, you can also withdraw your funds at any time without incurring any penalties, making ISAs a versatile and flexible savings and investment option

You can shelter returns from tax

The ISA allowance currently is set at £20,000 per tax year and provides another opportunity to shelter your returns from tax and maximize your savings. For married couples, the ISA allowance can provide even greater tax efficiency, as each spouse is entitled to their own ISA allowance. This means that a married could invest a total of £40,000 each in ISAs before 5th April, followed by a further £40,000 each on 6th April which is a total of £80,000 invested with all profits or dividends completely free from UK Income Tax and Capital Gains.

There are several types of ISAs available including cash ISAs, stocks, shares ISA, and innovative finance ISAs. Each type of ISA will have its own set of rules and regulations and is therefore important that you seek to understand which type of ISA is right for you and your investment goals. If you need advice on this then please do contact and reach out to our team who will be able to support and advise you based on your personal financial circumstances.

Let’s say as an example you are looking for a low-risk investment, a cash ISA may be a good option, whereas if you are looking for a higher return on your investments, stocks, and shares ISA may be better suited. Below is a brief overview of the six different types of ISA in the UK and their features and benefits.

1- Cash ISA:  A Cash ISA is a simple savings account where you can deposit your money and earn interest on it, free from UK tax. It is a great option for you if you are looking for a low-risk savings solution.  

Basic and higher-rate taxpayers receive a Personal Savings Allowance (PSA) that sets the amount of interest they can earn tax-free in any year. The total amount you can save in a Cash ISA in the current 2021/22 tax year is £20,000 and the next tax year 2022-23 as it stands will be the same.  Using a Cash ISA will give you further flexibility to earn interest from the ISA without paying tax on it. Different accounts are available, which can offer easy access to your money – useful for short-term savings. When deciding what to do with any spare money you have, it’s worth bearing in mind the effect of inflation on what your money can buy. If inflation is higher than the interest you’re earning, then the cost of living is going up faster than the rate at which your money is growing.

2- Stocks and Shares ISA: A Stocks & Shares ISA is a type of investment account that allows you to invest in shares, bonds, and other investments without paying UK income tax on any returns you make. It is a great option for you if you are looking to invest long-term.

In the current 2021/22 tax year, you can invest up to £20,000 in a Stocks & Shares ISA, which is generally considered a medium to long-term investment. You have complete flexibility as you can choose to invest your money in a wide range of different investments. You can invest a single lump sum or smaller amounts, but you must remember that once the tax year is over if you have not used all your ISA allowance, you will lose it.

3- Innovative Finance ISA: An Innovative Finance ISA is a type of ISA that allows you to invest in peer-to-peer (P2P) loans. This gives you the opportunity to earn a higher return on your investment, tax-free.  

They work by lending your money to borrowers, and in return, you receive interest based on the length of time and the risk of your investment. However, they are considered higher risk than other types of ISA due to the risk of default by borrowers and the lack of a secondary market for these types of assets.

4- Lifetime ISA: A lifetime ISA is designed for you if you are saving for a first home or for retirement and you are 18 or over. You can save up to £4,000 per year until you are over 50 and you must make your first payment into your ISA before you are 40. The government will then add a 25% bonus to your savings, up to a maximum of £1,000 per year. 

This is a longer-term tax-efficient savings account that when you turn 50, you will not be able to pay into it any longer or earn the 25% bonus from the government, but your account will stay open and your savings will still earn interest or investment returns. As with other ISAs, you won’t pay tax on any interest, income, or capital gains from cash or investments held within a Lifetime ISA.

 

5- Help to Buy ISA: ( you can no longer open this type of ISA account) It is a cash ISA that was specifically designed for first-time buyers enabling them to save up to £200 per month and the government then add a 25% bonus to your savings up to a maximum of £3,000.  

If you have one of these ISAs you can receive £50 for every £200 saved up to a maximum of £12,000. The tax incentive is capped at £3,000. You also earn tax-efficient interest on your savings as with a standard ISA. These ISAs are limited to one per person rather than one per house. So it’s good news if you were buying with someone at the time of opening this type of ISA and they also had a Help To Buy ISA, as you will both get the 25% bonus. It’s worth pointing out here that you can’t contribute to a Cash ISA in the same tax year, but you can keep saving in your account until 30 November 2029 when accounts will close to additional contributions. You must also claim your bonus by 1 December 2030.

6- Junior ISA: A Junior ISA is a tax-free savings account for children under 18. It’s a great way to help them build up a nest egg for the future, and you can save up to £9,000 per year tax-free. 

There are two types of Junior ISA: Cash Junior ISA and Stocks & Shares Junior ISA.

A Cash Junior ISA is essentially a savings account for children, where the interest earned is tax-free. The money invested in a Cash Junior ISA is kept as cash and not invested in the stock market. This type of JISA is a good option for parents who prefer a low-risk savings option for their child’s future.

A Stocks & Shares Junior ISA, on the other hand, is an investment account for children that allows you to invest in stocks, shares, funds, and bonds. This type of JISA is a good option for parents who are willing to take on more risk in the hopes of achieving higher returns over the long term.

In both cases, the amount is known as the annual subscription limit. It’s important to note that any contributions made by family and friends count towards the child’s annual subscription limit. This means that the total amount cannot exceed £9,000.

Now we have given you an overview of the 5 different types of ISAs. Let’s take a further look into the top 5 planning areas you should consider before the 5th of April 2023 for the tax year 2022-2023 in the UK.

  1. Your ISA allowance: don’t wait to use it

One of the most popular ways to save money tax-free is through an Individual Savings Account (ISA). This includes Lifetime ISAs, Junior ISAs, and Innovative Finance ISAs, although more widely recognised are Cash ISAs and Stock and Shares ISAs.  Every year, as a UK resident you are entitled to an ISA allowance, which allows you to save up to a certain amount of money without paying tax on any interest or investment gains. For the 2022-2023 tax year, the ISA allowance is £20,000, which means you can save up to that amount without being liable to pay tax. Needless to say, not everyone will be in a position to invest £20,000 every April, but the more you put in, and the earlier you do it, your financial situation will be more favorable. So, if you haven’t yet used up your ISA allowance, now is the perfect time to start.

  1. Top up your pension, but watch out for the lifetime allowance

Making pension contributions is another way to reduce the amount of tax you may be liable to pay. If you’re a UK taxpayer, you can receive tax relief on your pension contributions. For the 2022-2023 tax year, the annual allowance for pension contributions is £40,000 or your total annual income, whichever is lower. Remember, to receive tax relief, your personal contributions can’t be any higher than your earnings (or £3,600 if more). The lifetime allowance for most people in the United Kingdom for pension contributions in the tax year 2022-2023 is £1,073,100. This applies to the total of all the pensions you have, including the value of pensions promised through any defined benefit schemes you belong to, but excluding your state pension. If your individual pension savings exceed the lifetime allowance, you may be subject to a tax charge of up to 55% on the excess amount. ( or 25% if taken as income or placed in drawdown ) So, it is always a good idea to keep up to date with the latest regulations and speak to a financial adviser if you have any questions about your pension contributions. You can contact our team here and we would be happy to assist you.

  1. Make use of gift allowances

If you have a potential Inheritance Tax liability, there are ways of reducing this by making exempt gifts that are immediately outside of your estate. The IHT threshold for the 2022-2023 tax year is £325,000, which means that anything above that amount may be subject to tax.

The annual gift allowance is currently set at £3,000 per tax year in the UK. This means that you can give away up to £3,000 in gifts each year without incurring any IHT. If you don’t use your annual exemption in one tax year, you can carry it forward to the next tax year, allowing you to make a gift of up to £6,000 tax-free.

It is essential to understand that if you don’t use your annual exemption in one tax year, whilst you can carry it forward to the next tax year ( meaning that you can give away up to £6,000 in gifts tax-free in the following tax year.) you can only carry forward one year’s unused exemption, so it’s important to make use of this allowance every year if possible.

The annual gift allowance can be used for any type of gift, as long as it’s given with the intention of reducing your estate for IHT purposes. This can include cash gifts, assets such as property or shares, and other valuables

Additionally, there are some types of gifts that have their own specific allowances, such as a wedding or registered civil partnership gifts. For these  types of gifts, you can give up to £1,000 to any person, up to £2,500 to a grandchild or great-grandchild, or up to £5,000 to a child.

Outside of the wedding or registered civil partnership gift allowance, the annual gift allowance of £3,000 can be given to anyone. There is no limit on the number of people you can gift this allowance to, as long as it’s within the overall limit of £3,000.

If you can show that regular gifts were funded out of surplus income, not savings, you won’t pay Inheritance Tax. But it’s a complicated matter to prove, and in the event of your death, your personal representatives will need to provide evidence of your incomings and outgoings to demonstrate that the gifts were paid for out of surplus income, not from savings or investments.

  1. The personal allowance: how not to lose it

Everyone has a basic personal tax-free allowance. This is the amount of income you can receive tax-free each year. For the tax year 2022-2023, the personal tax allowance is £12,570. This means that you can earn up to £12,570 before you have to pay any income tax. Normally there is nothing that you need to do in order to receive your personal tax-free allowance, it should be automatically applied when you are paying taxes. If you earn more than this amount, you will start paying income tax on the excess amount, based on the tax bracket you fall into.

If you earn over £100,000, this will be reduced by £1 for every £2 you earn over that amount. Once your income reaches £125,140 or above, you will not be eligible for any personal allowance. This means that if you earn between £100,000 and £125,140, your personal allowance will be gradually reduced until it reaches zero. After this point, you will be taxed on your entire income without the benefit of a personal allowance. It’s important to keep this in mind when planning your income and tax strategy for the tax year 2022-2023.

You might be reading this and find yourself in a position where you are married or in a civil partnership and have not used all your personal allowance but your partner has. In this case, you will be able to transfer a portion of your unused allowance to your partner. This is what is referred to as Marriage allowance. By doing this you will be legally transferring assets or savings to your spouse meaning that they will then legally own those assets.

Alternatively, you can make use of the Marriage Allowance, which allows 10% of a non-taxpayers personal allowance to be transferred to their basic-rate tax paying spouse.

To apply for Marriage Allowance online you can head to the UK government website or contact HM Revenue and Customs.

  1. Don’t forget capital gains

The annual exemption in the tax year 2022-2023 for CGT in the United Kingdom is £12,300. If you have unrealized gains, you may decide to dispose of some before the end of the tax year to use up your annual exemption.

Married couples are taxed individually on capital gains, so transferring an asset from one spouse to another before realizing a gain can be tax-efficient as long as the transfer represents a genuine gift from one to the other. As far as possible, it is important to use the annual exemption each tax year because, if unused, it cannot be carried forward.

When you sell a property that qualifies for the main residence tax relief, you do not have to pay Capital Gains Tax (CGT) on it. This main residence relief is extended for 18 months after you vacate the property. What this means is that you can sell your family home within a year-and-a-half of moving out of it and still qualify for the main residence relief (that is, pay no CGT) Be sure to consider the CGT allowance and plan accordingly if you have any investments or assets that you are planning to sell.

All things considered, the different types of ISAs available in the UK can offer you a range of options to save and invest your money in a tax-efficient way. Whether you are looking for a simple cash savings account or a higher-risk investment option, there is an ISA that can help you achieve your financial goals. With the annual subscription limits for each type of ISA, it is important to plan and invest wisely to maximize the benefits of these accounts. So, take advantage of the options available to you and start saving and investing in your future from today.

Do take time to plan and consider making use of the above planning areas for the end of the tax year as this is not only a great time to take advantage of any allowances you might be entitled to that will reduce the amount of tax you pay, but by doing so, it will enable you to make the most of your finances giving you a more secure financial future.

If you need advice on your personal investment goals and risk tolerance, support in the planning areas, and how to get the most out of them so you can confidently make financial decisions that are right for you then please do reach out to our team.

The value of investments and income from them can go down. You may not get back the original amount invested.

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