The new tax year is here: what you need to consider to maximise your ISA allowance

Whilst the core benefit of an ISA is the tax-free returns, there are other features of the popular product – from ISA transfers through to the potential to split the ISA allowance across different types of account – that make it a crucial consideration when looking to maximise potential returns. 

And in order to make the most of your annual ISA allowance – and ISAs in general – these are the things you need to keep in mind.

You can split your ISA allowance across different types of ISA

For cautious savers, the Cash ISA – which is a savings product protected by the Financial Services Compensation Scheme (FSCS) – is likely the most appropriate ISA option. Therefore, those who are able to could choose to subscribe their whole £20,000 ISA allowance to the account.

But for experienced investors with the appropriate appetite for risk, there is much more to ISAs than the low yielding Cash ISA. 

With the Stocks and Shares ISA and Innovative Finance ISA (IFISA), capital is at risk and returns are not guaranteed, but potential returns are often in excess of 4% and, under the ISA tax wrapper, completely tax-free.

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This makes both accounts a valuable consideration, and because you are able to split the ISA allowance across multiple ISA types – and hold as many ISAs as you want – experienced investors have the opportunity to reap the benefits of each.

As an example of splitting the ISA allowance in order to take full advantage of each ISA, in 2021/22, an experienced investor could contribute £5,000 to a Cash ISA for easy-access cash, £5,000 to a Stocks and Shares ISA with a long-term outlook, and £10,000 to an IFISA for a fixed term of two years.

This enables investors to achieve a level of diversification within the ISA wrapper. Whilst the Stocks and Shares ISA and IFISA are both investment products with similar risk–return profiles, the latter is uncorrelated to the fluctuations of the stock market, and allows for investment into alternative assets – resulting in the potential for a well-balanced ISA portfolio.

You can transfer an ISA without contributing to your current ISA allowance

One crucial method for maximising the 2021/22 ISA allowance is to subscribe funds contributed in previous years as well, resulting in the chance to save or invest what could be substantially more than the ISA allowance each tax year. 

This is possible via an ISA transfer. When transferring an ISA – and remember, there is an official process which must be followed when doing so – funds do not leave the tax wrapper, and therefore do not count towards the current ISA allowance. 

As a result, an investor could choose to transfer £10,000 from a Stocks and Shares ISA opened in 2020/21 to an IFISA in 2021/2022 while still retaining the full £20,000 allowance from this tax year. 

Utilising ISA transfers means you are able to alter the weighting of your ISA portfolio based on current circumstances – both personal and based on wider market performance – without using up the current ISA allowance. 

For example, an experienced investor with £50,000 sitting in a Cash ISA from previous contributions could feel disillusioned with the rock-bottom interest rates on offer. An ISA transfer could allow this investor to transfer all or a portion of these funds into a higher yielding investment ISA (provided the investor has the appropriate appetite for risk and has seeked independent financial advice). 

Using your ISA allowance in full is crucial to maximise returns

Whilst it might seem obvious, utilising your full £20,000 allowance (where possible) is crucial when looking to maximise returns.

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Though achieving ISA millionaire status requires patience, through consistent use of their annual ISA allowance each and every year and building a diversified ISA portfolio, some investors have proven it is absolutely possible. 

In fact, if you were to begin investing the full £20,000 allowance every year starting now, and were achieving 5% annual growth, you could be an ISA millionaire in 25 years. Add in the occasional year when growth is higher – in the 7%, 8% or 9% range – and it becomes possible within just 20 years.

But keep in mind that this would require utilising investment ISAs whereby your capital is at risk and returns are not guaranteed. 

It’s also important to note that the ISA allowance is offered on a use it or lose it basis. Unused allowance from one tax year can not be carried over to the next – so take full advantage of it while you can.

Make the most of the annual ISA allowance

With the potential to split the allowance across ISAs, there are multiple opportunities to create a balanced and diversified ISA portfolio. On top of this, utilising ISA transfers results in the ability to subscribe far more to an ISA than just the £20,000 annual allowance. 

The tax-efficient benefits of an ISA are unrivalled – it is one of the most generous tax wrappers available. And as we begin the 2021/22 tax year, it’s important to consider how you can maximise the generous ISA allowance and use it to its fullest.