Whether you are an experienced investor or you are starting to save and invest for the first time, we are here to help you get the most from your 2020/2021 ISA allowance. With just five weeks left until the end of this tax year, now is a good time to get organised if you want to avoid missing the 5th April deadline.
An ISA is the shortened name for Individual Savings Account, which 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, so it is a valuable part of many people’s financial plans. Yet every year people miss the deadline to use some or all of their annual ISA allowance, because they leave making their ISA contributions until it is too late.
If you would like one of our team of financial advisers to review your existing stocks and shares ISA investments or to invest new money and use your 2020/2021 ISA allowance, then it is a good idea to start that process now. With large numbers of people investing in the weeks before the deadline, it is important to speak to your adviser before time runs out.
Why does the ISA deadline matter?
UK residents get an ISA allowance for each tax year, and for the 2020/21 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 the end of each tax year becomes the ISA deadline. The tax year runs from 6th April to midnight on 5th April. As soon as the clock strikes past midnight, a new tax year begins, and any unused tax allowance is lost. The deadline is exactly that and the rules are very clear: online transactions made during the early hours and before business starts on 6th April automatically fall into the new tax year and are taken out of the new ISA allowance.
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 40%.
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 loved ones or 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.
At Furnley House we can advise you on all types of ISA accounts.
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. 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 do not allow you to withdraw money at any time, and have different rules.
Interest rates offered on cash savings are low at the moment, and because of that many more people may be considering moving their money into a stocks and shares ISA. Whilst this does offer the potential for higher returns over the long term, stock and shares investments carry higher risks and the value of your investments can go down as well as up, so you may get back less than you originally invested.
It is worth remembering that ISAs were introduced in 1999 and you may be one of the many people that have investments which have been held for a very long time. It may be of benefit to review these ISA accounts to ensure they are on track to help you with your future financial plans, and if money is invested to ensure funds are still in line with how comfortable you are with taking investment risk.
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 speak to one of our Financial Advisers or email email@example.com
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.
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