The reset annual ISA allowance comes into effect on 6th April, meaning there are just a few short weeks left for ISA savers and investors to decide where and how they will put their allowance to work.
And for experienced investors in particular, the ISA allowance brings with it unbeaten opportunities to maximise tax-free returns – be that through spreading the allowance across ISA products with varying risk–return profiles, or making the most of ISA transfers.
In order to truly take full advantage of the generous annual ISA allowance, these are four things experienced investors need to remember.
1. The annual ISA allowance is completely tax-free
The first point is an obvious but crucial one, and one that can often be glossed over as it’s such a generous amount in many ways – the annual ISA allowance is completely tax-free.
Since the 2017/18 tax year, the ISA allowance has been sat at £20,000 after gradually increasing from £7,000 when the ISA was introduced in 1999/00. This means that at present, savers and investors can subscribe up to £20,000 to an ISA each year and benefit absolutely no income tax or capital gains tax to pay on returns. This is completely irrelevant of whether you see a 0.1% gain or a 8% and your gains remain tax-free for as long as your investment remains in an ISA wrapper.
This has the potential to be extremely lucrative, especially when experienced investors – who have the means to – contribute the allowance in its entirety to an ISA each year. By adopting this consistent approach, some investors have even become ISA millionaires.
2. You can choose to subscribe the whole allowance to one ISA or spread it across several different types
There are four main ISA products – the Cash ISA, Stocks and Shares ISA, Innovative Finance ISA (IFISA) and Lifetime ISA. And because it is possible to open and subscribe funds to one of each kind per tax year, experienced investors with the appropriate appetite to risk are able to make the most of what each has to offer.
This results in opportunities to build a diversified portfolio with both savings and investment ISA products which provide differing risk–profiles and target individual investment goals.
For example, an experienced investor could choose to subscribe £5,000 to a Cash ISA, £5,000 to a Stocks and Shares ISA and £10,000 to an IFISA in 2021/22.
With this, the Cash ISA would be offering rock-bottom interest rates, but – provided it’s an easy-access account – it would mean the investor can access funds at a moment’s notice if needs be.
On the other hand, by opting to take more risks with a Stocks and Shares ISA and/or IFISA, the investor’s 2021/22 tax-free ISA allowance could also be targeting higher returns in excess of 7%.
It is important to note you can not open and subscribe funds to more than one of the same type of ISA in a single tax year without transferring the original ISA to the new one in its entirety. In addition to this, if you choose to open the same type of ISA as opened in a previous tax year, you will no longer be able to subscribe funds to the original ISA.
3. Utilising ISA transfers results in opportunities to ensure past ISA allowances are still working hard for you
ISA transfers are often under-utilised – and sometimes, ISA savers and investors are unaware of them altogether.
But when used in the correct manner, they have unrivalled potential to ensure each and every ISA allowance you have subscribed to is continuing to work in the most appropriate way for your current portfolio needs.
Importantly, ISA transfers do not contribute towards the ISA allowance, and as long as funds have not been withdrawn from their ISA wrapper – which, if the ISA transfer process has been completed correctly, they will not have to be – they maintain their tax-free status.
Therefore, ISA transfers allow past ISA allowances to be moved from one ISA to another without having any effect on the current tax year’s allowance.
For example, take an investor who subscribed £10,000 from their 2019/20 ISA allowance to a Stocks and Shares ISA and the following year, used their full 2020/21 £20,000 ISA allowance to invest into an IFISA. After the fluctuations caused by the Coronavirus pandemic, the investor became disillusioned with the volatile nature of the stock market and decided that as of 2021/22, they wanted to invest all of their funds into an IFISA instead.
To do this, they transferred the £10,000 in their Stocks and Shares ISA (from 2019/20) to the IFISA opened in 2020/21, and then come 6th April 2021, they subscribed their whole 2021/22 £20,000 allowance to the same IFISA. This means they now have £50,000 tax-free working hard in an IFISA, yet have not exceeded their annual ISA allowance.
4. If you don’t use the full annual ISA allowance, you can not carry it over to the new tax year
We’ve mentioned previously how important and potentially lucrative it is to use the ISA allowance in full each year if you can, and it’s crucial to always remember that any unused ISA allowance from one tax year can not be carried over to the next.
The deadlines are strict for this, too - if your funds aren’t sat within an ISA wrapper by 11:59pm on 5th April, the allowance for the year will be gone and cannot be accessed.
Therefore, if you have any of your £20,000 2020/21 ISA allowance yet to be subscribed, you must do so before 6th April or you will lose it.
Making the most of the annual ISA allowance
There are few tax reliefs quite as generous as the annual ISA allowance, and it is evident that for experienced investors who know how to use it to its full advantage, the benefits can be great.
With an understanding of the four key points mentioned above, experienced investors can get on the right track to making the most of their annual ISA allowance.