If, like us, you have lost track of time a bit during lockdown 3.0, it’s now just seven weeks to the end of the financial year 2020-21. So it’s time to make the most of any allowances you may not have used for this tax year, before it flips over into the next on Tuesday 6 April 2021. This includes your tax-efficient allowance for your ISA.
ISAs are simple
An ISA is simply a ‘tax-efficient wrapper’ designed to go around an investment.
- A Cash ISA is like a normal deposit account, except that you pay no tax on the interest you earn.
- Stock & Shares ISAs allow you to invest in equities, bonds or commercial property without paying personal tax on your proceeds.
Got an ISA? Make the most of it
Each tax year, you have an annual Individual Savings Account (ISA) allowance. This is a set amount that you can save into an ISA over the 12 month tax year. The proceeds of an ISA are shielded from Income Tax, tax on dividends and Capital Gains Tax, so it’s a tax-efficient way to save. This can build up quickly, letting you accumulate a substantial tax-efficient gain in the long-term too
The ISA limit for 2020/21 is £20,000. That means you can pay in up to £20,00 into one or several ISAs, but not more than £20,000 in total across all your ISAs. If you haven’t used your full allowance, you should consider topping up your overall contribution of £20,000 before the deadline at midnight on Monday 5 April 2021.
One ISA or many - it’s still a £20k limit
You have a total tax-efficient allowance of £20,000 for this tax year. This means that the sum of money you invest across all your ISAs this tax year (Cash ISA, Stocks & Shares ISA, Innovative Finance ISA, or any combination of the three) cannot exceed £20,000. So, for example, you may invest £10,000 in a Stocks & Shares ISA and the remaining £10,000 in a Cash ISA.
Not got an ISA yet?
If you have cash lingering in an account with very low interest rates, it may be worth opening an ISA before the end of the tax year and moving the cash across. So long as you do not put more than the annual limit into the ISA, any interest earned will not be taxable. Then, from the start of the next tax year, you can add to that ISA, or open another.
Cash ISAs: easy(ish) access
Most cash ISAs are flexible, so you can take money out of your Cash ISA if you need it. How how much you can take out, and how often, depends on which type of ISA you have. If your ISA is ‘flexible’, you can take out cash then put it back in during the same tax year without reducing your current year’s allowance. Your provider can tell you if your ISA is flexible or not. In contrast, a fixed-rate Cash ISA will typically require you to tie your money up for a set amount of time. If you decide to cut the term short, you usually have to pay a penalty. However, fixed term ISAs usually offer higher rates of interest as a result.
Stocks and Shares ISAs: for the long term
Stocks & Shares ISAs and Innovative Finance ISAs don’t usually have a minimum commitment, which means you can take your money out at any point. That said, you should invest for at least five years. As such, if you’re looking to use your money within the next few years, you should probably keep it in a Cash ISA.
Lifetime ISAs: age limited
A Lifetime ISA is only available to those aged between 18 and 39. You can save up to £4,000 each tax year, every year until your 50th birthday. The government will pay an annual bonus of 25% (capped at £1,000 per year) on any contributions you make. So if you’re in the age bracket, it is a very good deal, equating to 25% interest!
Peer to Peer lending ISA
If you’ve been tempted by peer to peer lending, an Innovative Finance ISA may be the answer. This kind of ISA allows you to use some or all of your annual ISA allowance to lend funds through the Peer to Peer lending market. Peer to Peer lending allows individuals and companies to borrow money directly from lenders. However, it does come with strings attached. Your capital and interest may be at risk in an Innovative Finance ISA and your investment is not covered under the Financial Services Compensation Scheme.
You can transfer an existing ISA from one provider to another at any time as long as the product terms and conditions allow it.
- If you want to transfer money you’ve invested in an ISA during the current tax year, you must transfer all of it.
- For money you invested in previous years, you can choose to transfer all or part of your savings.
If you have several ISAs with various providers, you can consolidate them without losing the tax-efficient ‘wrapper’ status. Consolidating your ISAs may also substantially reduce your paperwork, good news for that tax return form! If you’re not sure how to do this, or if it is right for you, we’ll be happy to talk you through the advantages and disadvantages of doing it.
Not sure how to make the most of ISAs?
Contact us here at Panthera Wealth to book your initial online consultation.
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