The annual ISA allowance was unchanged in the Chancellor of the Exchequer’s Autumn 2021 Budget, instead being frozen at £20,000 – where it has stood since 2017/18 – for at least another year.
Though this wasn’t the best case scenario (that would have been an increase), it is positive news amidst concerns that the Government would make allowance cuts in order to recuperate the £370 billion the National Audit Office (NAO) estimate they have spent on Coronavirus-related measures.
The freeze means that ISA savers and investors have any of their unused £20,000 allowance to utilise for the remainder of 2021/22, before it then resets at the same amount for 2022/23 on 6th April 2022.
In order to make the most of both any remaining ISA allowance from the current tax year and their full, reset allowance in 2022/23, there are several important considerations for experienced investors – from utilising the allowance in full where possible, to making the most of ISA transfers.
Where possible, subscribe the full £20,000 ISA allowance each tax year
In the 2019/20 tax year, the average amount subscribed to an ISA was just £5,740, far below the generous £20,000 allowance.
Whilst it’s understandably not possible for all savers and investors to subscribe £20,000 to an ISA each tax year, given the unrivalled tax-efficient benefits of an ISA, it’s a key consideration for those who can – particularly now, as taking steps to maximise potential returns becomes more important than ever amidst soaring inflation rates.
But it’s unsurprising that, in the current all-time low interest rate environment, investors would choose to contribute smaller amounts to the likes of the savings-based Cash ISA – a product in which their capital actually risks being eroded in value over the long-term due to rates failing to keep pace with inflation.
However, though the Cash ISA and its Financial Services Compensation Scheme (FSCS) protection is a key component of the ISA market for cautious investors, experienced investors with the appropriate risk appetite have a number of higher risk/higher potential return options to choose from when subscribing their allowance, such as the Innovative Finance ISA (IFISA).
Consider all of your ISA options and spreading your allowance across products
With the highest rate available on an instant-access Cash ISA just 0.67% at present, it’s clear to see why the product – which is often considered synonymous with the wider ISA term – is not an appealing prospect for experienced investors looking for an ISA with growth potential.
But whilst instant-access cash savings are undoubtedly important within any portfolio, the ISA market is now much more than just the low-yielding Cash ISA. Investment products such as the Stocks and Shares ISA and IFISA target higher returns for an increased level of risk and the ability to contribute to multiple types of ISA at the same time results in opportunities for experienced investors to maximise their annual ISA allowance and build a diversified portfolio.
Experienced investors aged 18 and over are able to subscribe their £20,000 ISA allowance to up to four ISA products each tax year – one of each kind. This approach allows investors to utilise the allowance to meet a range of investment objectives and timeframes.
As an example, an investor who is willing and able to take on higher levels of risk but wants to ensure the bulk of their capital is only tied up for a medium-term could contribute £5,000 to a Stocks and Shares ISA and £15,000 to an IFISA with a four year fixed-term.
Moreover, an investor who subscribed £10,000 to a Cash ISA and £5,000 to an IFISA at the start of the current tax year, leaving £5,000 to subscribe at a later date, could choose to subscribe their remaining allowance to their IFISA after becoming disillusioned with the rock-bottom growth they’ve seen on their cash funds.
And if said investor wanted to alter the weighting of their ISA portfolio away from cash more substantially, they could also take advantage of ISA transfers, transferring capital from their Cash ISA to their IFISA without affecting their ISA allowance at all.
Make the most of ISA transfers
Underutilised by the majority of investors, ISA transfers can be extremely powerful and beneficial in helping to maximise your annual ISA allowance.
When completed correctly, an ISA transfer can allow investors to save or invest what could be considerably more than the £20,000 allowance each year – without breaking any rules, as transfers are not governed by the annual ISA allowance.
There are a multitude of reasons why transferring an ISA may be needed – from the desire to transfer to the same type of ISA but with a different provider offering a better rate, through to wanting to move funds to a different ISA product altogether.
It’s crucial that experienced investors assess their ISA portfolio’s on a regular basis to determine whether their all-important investment goals are being met. In the event that they are not – for example, due to the extreme stock market volatility witnessed over the last two years – transferring funds to a different product could be a key consideration for those wanting to ensure their ISA allowance is being used to its full potential.
Using your annual ISA allowance to its maximum
Over 20 years after their introduction, the ISA continues to be one of the most generous tax incentives available to savers and investors in the UK, with an annual allowance that has been on an upward trajectory since it started at just £7,000 in 1999/00.
Now confirmed to stay at £20,000 for 2022/23 – and with just over five months until any remaining allowance from 2021/22 is lost – it’s time for experienced investors to consider how they will use it to its maximum in order to see the best potential tax-free capital growth.