How to use your ISA tax allowance before tax year end
The 2022/23 tax year is approaching its end, and now is the time to think about doing more with your money before deadline day on April 5.
Using an Individual Savings Account, an ISA, offers you a way to grow your money tax free. You won’t pay income or capital gains tax on the returns your ISA generates or on increases in value.
If you already have an ISA, now is the time to think about filling your ISA up. If you don’t have an ISA, it can be quick and easy to set one up. Consider your options today and choose an ISA that is appropriate for your goals. You get one £20,000 allowance in the 2022/23 tax year, regardless of whether you choose to invest this in a Cash or Stocks & Shares ISA. You can split this allowance across both ISA types.
The ISA you are perhaps most familiar with is the Cash ISA, which is a basic ISA that is linked to interest rates. You can invest up to £20,000 in the current 2022/23 tax year.
This type of ISA could be useful for those with shorter term goals, or savers who are averse to risk.
However, medium to long term goals may be less suitable, as current low interest rates are unlikely to beat high inflation rates. In other words, prices of goods are going up quicker than the value of your ISA savings, your cash is losing value.
With this in mind, perhaps only consider a Cash ISA for shorter term goals such as holiday savings or events in the next few years.
Stocks & Shares ISA
A Stocks & Shares ISA is an ISA in which you can invest up to £20,000 in the current 2022/23 tax year. At True Potential, this is a flexible type of ISA, meaning if you withdraw from the ISA you can repay any withdrawals during that tax year back into the account without this counting towards your allowance.
This type of ISA is more useful for medium and longer term goals, and performance is linked to the funds invested in.
For example, a diversified Portfolio may be invested in funds of Stocks & Shares across the US, Europe and emerging markets. Performance isn’t linked to an interest rate like a Cash ISA, meaning there could bean opportunity for performance to beat inflation – however markets can go down as well as up, which is why it is best to invest for at least three to five years. This could give you time to ride out potential volatility in markets.
At True Potential our Stocks & Shares ISA is invested in globally diversified Portfolios that match your attitude to risk and are managed by our expert in-house Investment Management team working with fund managers across the globe.
What about other ISAs?
A Lifetime ISA helps you to save for a deposit to buy your first home or for your retirement. It is designed for people aged 18 to 39. You can contribute up to £4,000 in this 2022/23 tax year and the government will give you a 25% bonus – up to £1,000. You can use a Lifetime ISA to buy your first home worth up to £450,000 or invest into it until you are 50, and access it at 60. In both instances, you can withdraw your money tax free, including the 25% bonus.
The Junior ISA allows you to invest up to £9,000 in the 2022/23 tax year, and this can be as a Cash ISA or a Stocks & Shares ISA, or you can hold both types. You contribute specifically for the future of your child, and they’ll be able to take control of the account at 16 and then access the money when they turn 18. This could be a useful way to build a pot for them towards education fees or their first home.
Take a long term perspective
The right ISA for you is dependent on your goal.
If your goal is three to five years away, a Stocks & Shares ISA is an effective and tax efficient way for you to potentially grow your money.
Using up all or as much of your £20,000 allowance before April 5 makes sense, as this money may be losing value in Cash accounts. Using the allowance as early as possible also means your money has longer to potentially grow over time.
You can then start the new tax year on April 6 with a fresh £20,000 allowance. If you can, fill the allowance at the start of the new tax year to benefit from more time in the markets.
Use it or lose it
An ISA allowance can’t be carried over into the next tax year, it is a case of use it or lose it. That’s why it is so important to use your allowance now if you can, so you can benefit from doing more with your money now and then starting afresh on April 6.
You can use your £20,000 allowance across ISAs, for example, a Cash ISA and a Stocks & Shares ISA. It is an allowance for the overall ISAs you hold. For example, £10,000 into a Cash ISA and £10,000 into a Stocks & Shares ISA. You can only pay into one of each type of ISA in a single tax year. In other words, the Stocks & Shares ISA you are paying into is your set Stocks & Shares ISA for the tax year.
You don’t want to be in a last minute position on April 5 with money to invest, but not the time to get it sorted, and then having to eat into next year’s allowance. Do more with your money and consider your ISA goals and allowances today.
With investing, your capital is at risk. Investments can fluctuate in value, and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice or a personal recommendation.