For 2024/25 there are a number of different ISAs available to individuals as follows:
- Stocks and Shares (S&S) ISA;
- Cash ISA;
- Lifetime ISA (LISA); and
- Junior ISA (JISA).
The government offers a maximum £20,000 ISA allowance. However, there is an instance where you are able to obtain a £21,000 ISA allowance if you were to maximise the use of your £4,000 LISA allowance and receive the £1,000 government bonus. This allowance can be used via one or a combination of the above ISAs and following the recent change in legislation as part of the Spring Budget 2024, an individual is entitled to open as many ISAs, irrespective of type of ISA, as they see fit subject to not exceeding the ISA allowance in the tax year.
Separately and also discussed in the Spring Budget 2024, was the potential introduction of a British ISA which may provide an additional £5,000 allowance on top of the aforementioned ISA allowance.
For clarity, ISAs allowances run in line with the tax year with an annual deadline on the 5th April; unused allowances in a tax year are lost as there is no ability to carry forward unused allowances.
What are the benefits of investing through an ISA?
Tax-efficient savings: ISAs are a fantastic savings tool in which investors benefit from not paying tax on dividends, capital gains or interest earned in the account. This allows your investments to grow tax free, potentially maximising your returns by benefitting from compounding growth over the long term.
Diverse investment options: Within ISAs (excluding a Cash ISA), you have the flexibility to invest in a wide range of assets, including equities, bonds, funds and investment trusts. This allows you to diversify your portfolio (which may help to reduce risk) and tailor your investments according to your risk appetite and financial goals.
Annual allowances for family members: As discussed above, each adult individual, who must be a UK tax resident, has the use of an ISA allowance annually. In the case of JISAs for children, it is important to note that it is possible for parents, grandparents or anyone else to contribute and make use of their £9,000 annual JISA allowance which they are eligible to do from birth, noting that only a parent or guardian can establish the account in the first instance. These allowances enable you to invest tax efficiently on behalf of your family.
Accessibility: ISA accessibility is important as it provides the ability to withdraw money whenever you need it free of charge, without incurring penalties or losing the tax-efficient status of your investments. This is slightly different in the case of LISAs which are more restrictive with their withdrawal capabilities and if not abided by can incur penalties.
A reasonably new addition to Cash and Stocks & Shares ISAs is being “flexible” which allows you to withdraw monies from your accounts and subject to you replacing the monies in the same tax year there is no penalty or loss of ISA allowance. An example of this may be drawing £50,000 from your Stocks & Shares ISA to cover an unexpected tax bill in January which you then replace in full in March on receipt of your bonus, followed by a £20,000 contribution to fully utilise your ISA allowance in early April prior to the end of the tax year.
Why is it important to consistently invest into an ISA in the tax year?
When it comes to investing, you will likely often hear of good strategies, and effective ways to maximise returns, but one absolute that can always be relied upon is that time is what you really need. A little forward thinking can go a long way, as a longer time horizon allows you to consider taking on more risk with your money than you might be comfortable with under a shorter-term investment, with the aim of producing higher returns.
With the end of the next tax year currently around a year away, it may feel premature to think about your ISA contribution right now – but the earlier you invest releases the possibility of compound returns – investment and interest.
While we tend to advocate “time in the market” or investing earlier in the tax year, we appreciate that this is not always viable for everyone from a cash flow perspective and therefore our fundamental viewpoint reverts to consistency of investing whether that be the first or last day of the tax year. We understand that it may be more feasible for most to regularly drip feed available liquidity or “cost average” into their ISA; this would provide the added benefit of smoothing the volatility of the markets which a lump sum would not while utilising part or all of the tax-efficient ISA allowance throughout the tax year.
While many savings accounts and other investment products are providing more than respectable returns in the current climate, we would continue to recommend that, where possible, ISA allowances are utilised to the full extent not only for the tax-efficient nature of the ISA wrapper but for the points detailed above.
The information provided in this article is of a general nature. It is not a substitute for specific advice with regard to your own circumstances. Investments can go down as well as up in value, so you could get back less than you have invested. Please remember tax rules can change and benefits depend on personal circumstances.
