5th April ISA Deadline: Use It Before You Lose It

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March 09, 2022 - Furnley House

5th April ISA Deadline: Use it before you lose it

Inflation has been a hot topic over the past year. The daily cost of living has got higher, and interest paid on cash savings is not keeping up with the rising costs of food and fuel.

If you have money held in either cash or investments account’s, one important way to offset concerns about inflation is to make sure you are not paying unnecessary tax on any interest or gains paid. The easiest way to do this is to use your Individual Savings Account (ISA) allowance each year, and the 5th April deadline to use your 2021/22 allowance is fast approaching.

An ISA is a savings and investment account that pays tax-free interest payments. It is one of the few tax relief incentives offered by the Government to UK residents.

Why does the ISA deadline matter?

UK residents get an ISA allowance for each tax year, and for the 2021/22 tax year it is £20,000. This is the maximum amount you can save in a tax-free cash or investment ISA. At the end of each tax year this allowance is reset: so if you don’t use it, you lose it.

Why are ISAs important to High Rate Tax Payers?

You do not pay tax on interest paid on cash savings, or income or capital gains from investments when the money is held in an ISA account. Other types of savings or investment don’t offer this tax relief, so you have to pay tax on gains or interest you receive, and for high rate tax payers, this is at a rate of 45%.

Using the ISA allowance available each year can enable high rate tax payers to build significant sums of money tax efficiently. Some people use ISAs as a flexible way to save for retirement alongside their pension: as the years pass by, they find that they hold several hundreds of thousands in tax efficient ISAs.

What are my ISA account options?

There are 4 types of ISAs available to adults:

Cash ISA, which is used to hold cash savings.

Stocks and shares ISA, which can include shares in companies, unit trusts and investment funds, corporate bonds, government bonds.

Innovative finance ISA, these can include peer-to-peer loans – loans that you give to other people or businesses without using a bank or ‘crowdfunding debentures’ – investing in a business by buying its debt.

Lifetime ISA, you must be 18 or over but under 40 to open a Lifetime ISA. The aim of this account is to help you save for your first home or retirement. You can put in up to £4,000 each year, until you are 50 and the government will add a 25% bonus to your savings, up to a maximum of £1,000 per year. Lifetime ISAs can include stocks and shares.

If you have children in your life then you can invest or save into a Junior ISA on their behalf. Whilst children typically don’t pay tax on savings or investments, the tax efficient wrapper of the ISA will continue after the child turns 18.

You can open more than one type of ISA in any tax year, so you can put money into a cash ISA as well as a stocks and shares ISA. But you must not exceed your total allowance of saving or investing more than £20,000.

Can I change the investments or savings accounts in my ISA?

You can move or transfer your cash savings or investments to a new provider at any time and retain the tax efficient ISA wrapper in which that money is held. You can also switch the money between cash and investment holdings at any point. When you move money between accounts you should use the ISA transfer process, and not withdraw and reinvest the cash. If you withdraw the money without doing this, you will not be able to reinvest that part of your tax-free allowance again.

If you have a flexible ISA, then the transfer rule may not apply. 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. Lifetime ISAs have different rules.

Interest rates offered on cash savings are low at the moment, and with the added concerns about inflation, many people may be considering moving their money into a stocks and shares ISA. Investments do offer the potential for higher returns over the long term, however the value of the funds can go up and down, and you may get back less than you originally invested. A financial adviser will be able to help you chose investments which best suit your attitude towards investment risk and it is important to seek advice If you are unsure.

If you would like to find out more about using your ISA allowance for this current tax year, call Furnley House on 0116 269 6311 and ask to speak to one of our Financial Advisers or email info@furnleyhouse.co.uk

 

Past performance is not a reliable indicator of future performance.

The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.

All information correct at time of writing.