The new tax year, which begins on 6th April 2023, is fast approaching. In the run-up, many investors will have their annual ISA allowance in mind – both their current, remaining 2022/23 allowance and their reset, £20,000 allowance for 2023/24.
As well as subscribing any remaining ISA allowance before it’s lost – because remember: leftover allowance from the current year can not be carried forward into the next – now is a great time to reassess your ISA portfolio to ensure your past allowances are still working hard to meet their goals.
If you’re disillusioned with the performance of your ISAs, an ISA transfer could be a crucial tool, allowing you to rebalance your ISA portfolio without contributing to the current year’s allowance.
But many investors fail to utilise their ISA allowance to its full potential. In 2021, research from Sanlam found that among those with at least £50,000 in investable assets, fewer than half had used their full ISA allowance.
There are numerous reasons why many people may decide against using their full ISA allowance (or any at all). Among these are a number of myths and misconceptions that can result in investors underestimating the potential of the tax-free wrapper.
Below we’ve debunked some of the myths surrounding ISAs, to help you understand how the product could work for you.
MYTH 1: You can only have one ISA per year
This is not true. In fact, you can split your ISA allowance across ISA products and contribute to up to four (one of each) per year. The result of this can be a balanced and diversified ISA portfolio allowing exposure to a number of asset classes including cash, equities and alternative investments such as property bonds.
As an example, come 6th April 2023, an experienced investor with the appropriate risk profile could choose to subscribe £5,000 to a Cash ISA, £5,000 to a Stocks and Shares ISA, and £10,000 to an Innovative Finance ISA (IFISA).
MYTH 2: The personal savings allowance (PSA), capital gains tax (CGT) allowance and dividend allowance render ISAs and their tax-free wrapper pointless
The core advantage of ISAs is their tax-free wrapper, but there are other allowances available that mean you won’t necessarily pay tax on savings and investments held outside of an ISA up to a certain amount.
The PSA means that basic-rate taxpayers can earn up to £1,000 in interest on savings without tax becoming payable. This falls to £500 for higher-rate taxpayers, whilst additional-rate taxpayers are not eligible for the PSA.
Meanwhile, any and all interest earned on savings held within a Cash ISA is free from tax, regardless of your tax rate. Therefore, if you’re an additional-rate taxpayer – which an extra 250,000 people in the UK will become on 6th April, due to tax threshold changes announced in last November’s Autumn Statement – or are likely to earn above your PSA in interest, an ISA is certainly an important consideration.
Chancellor Jeremy Hunt also revealed reductions to both the CGT and dividends allowances in the Autumn Statement. The former will more than halve from its current level of £12,300 to £6,000 in April 2023, before halving once more to £3,000 in April 2024. Likewise, the latter is halving from £2,000 to £1,000 in April 2023, then again in April 2024 to £500.
With £3,000 the lowest CGT allowance since 1981 and the reduction to the dividends allowance representing one of the most drastic of any tax in the same period, these changes will have a notable effect on many investors unless a focus is shifted to tax-efficiency.
MYTH 3: The only ISA products available are the Cash ISA and Stocks and Shares ISA
Whilst the Cash ISA and Stocks and Shares ISA are the most well-known in the ISA market, they’re no longer the only option for investors.
In April 2016, the IFISA was introduced, allowing experienced investors to hold alternative investments including peer-to-peer loans and debt-based securities under the tax-free wrapper for the first time.
The IFISA is an important consideration for experienced investors looking to diversify their ISA portfolio with alternatives; something many investors may be contemplating more than ever against the current backdrop of a fluctuating equities market.
The target returns offered on an IFISA will be dependent on the underlying asset, but for a property-backed IFISA, returns are often in excess of 9%. As a result, with UK inflation expected to peak at 11% this year, the product could be a key consideration for investors particularly interested in growing their wealth with impact.
In addition to the Cash ISA, Stocks and Shares ISA and IFISA, the latest product to join the ISA family is the Lifetime ISA. The Lifetime ISA is for those saving for either their first home or for retirement, and it boasts a 25% Government bonus of up to £1,000 per year.
MYTH 4: Once you’ve opened and contributed to an ISA, you can’t move your capital
It’s important to be aware that there may be some restrictions when it comes to transferring an ISA – particularly fixed-term ISAs before the term ends – but for the most part, ISA transfers can be incredibly beneficial for anyone wanting to move funds from one ISA to another, allowing investors to save or invest what could be considerably more than the £20,000 ISA allowance each tax year when completed correctly.
There are several reasons an ISA transfer may be required. This includes the desire to transfer to the same type of ISA with a different provider for a better rate, or to transfer to a different ISA product altogether.
And particularly as it nears the end of the tax year, most investors will assess their ISA portfolios, looking to determine whether their all-important saving and investment goals are being met. If they’re not, altering the weighting of your ISA portfolio by transferring to another may be key to ensuring your funds are working their hardest.
As an example, an experienced investor with £20,000 in a Stocks and Shares ISA subscribed in 2022/23, but who has come become disillusioned with the recent volatility of the equities market, could choose to transfer £10,000 to an IFISA in 2023/24, before also subscribing some or all of their 2023/24 allowance.
Utilising the ISA in 2023/24
Shielding you from tax, allowing you to diversify across multiple assets all within the wrapper and giving you the ability to move funds should your ISA stop performing as expected, it’s clear the ISA and its tax-free wrapper have the potential to be an important and beneficial tool in helping you to maximise returns.