How to save more through ISAs

What is an ISA?

You can save up to £20,000 tax-free every year across Individual Savings Accounts (ISAs). This is a great way of maximising returns while minimising the tax burden on your savings or investments.

Outside of an ISA, you would pay up to 20% tax (24% on residential property) on any gains over and above the annual capital gains tax allowance - which is £3,000 for the 2024/25 tax year upon sale of an asset.

Any dividends received from shares held outside of an ISA could be taxed up to 39.35% if they exceed the annual allowance which is £500 in the 2024/25 tax year. Depending on your income level you may also pay tax on the interest your cash savings attract in the bank.

What are the different types of ISA?

There are four main types of adult ISAs and one junior ISA available. The maximum amount you can deposit across ISA accounts is subject to annual subscription limits. The annual subscription limit for the current tax year is £20,000.

1. Cash ISA – The most common and straightforward type of ISA, is a cash savings account that pays interest.
2. Stocks and Shares ISA – As the name suggests, in this type of ISA your money is invested in assets like shares, bonds, property, and commodities.
3. Lifetime ISA (LISA) – LISAs can be held in cash or invested in a range of assets. These are designed to either be used as a deposit on your first home or as savings towards your retirement. The maximum contributions are £4,000 per year and the government gives you 25%, up to £1,000 per year, to help boost the savings. There are some restrictions however, in terms of access and use.
4. Innovative Finance ISA - This is a specialised type of ISA: It enables you to become a lender, providing loans to approved individuals and businesses through an online peer-to-peer lending platform in return for a fixed amount of interest over a set period.
5. Junior ISA (JISA) - These can be invested in stocks or shares or held as cash. They can be set up for children under the age of 18 who live in the UK to help prepare for their future. The allowance for a JISA is £9,000.

How does the £20,000 allowance work?

You can put up to £20,000 in an ISA in your name each tax year, which is a limit set by HMRC, and this can be split across various ISA accounts. 

Changes in the Spring Budget 2024 mean you can invest money into more than one ISA of the same type in one tax year. For example, you can now invest into two stocks and shares ISAs in the same tax year, as long as these contributions do not total more than your £20,000 ISA allowance when combined.

The allowance limit is reset at the beginning of each new tax year, which starts on 6 April. Any unused ISA allowance is not carried over into the next tax year's allowance.

What should I consider when opening up a stocks and shares ISA?

1. Your options - ISAs offer a wide range of investment options, including stocks, bonds, cash and funds. Not all providers offer the same range of products so make sure you select one that meets your investment requirements.
2. Your goals - You should understand the reason behind your investments. Do you need income or are you looking to accumulate and grow your wealth?
3. Your risk appetite - You can use ISAs to diversify your investment portfolio. Before making any investment decisions, it is important to understand your risk appetite.
4. Fees and charges - You should always compare the fees and charges associated with different ISAs before making an investment.

Can ISAs help me to achieve my financial goals?

• By making your annual ISA subscription, you are building tax-free wealth. And, when considering additional factors like compound interest and the range of investment options, an ISA becomes a very attractive savings option.
• Most ISAs allow clients to withdraw funds penalty-free, providing flexibility when taking capital or income in the future. This is particularly useful during retirement.

Will the cuts to the dividend allowance and capital gains tax allowance impact ISAs?

The short answer is no. This makes investing in an ISA an even more attractive option. The potential for mitigating capital gains tax through general investment accounts is decreasing, while the tax saving opportunities through ISAs remain generally strong.

If you’d like to set up an ISA or explore your other financial options, get in touch for a free, impartial conversation.