Tax Changes are Coming: Why Utilising Your ISA Allowance is More Important Than Ever

As we near the beginning of a new tax year, we also near the implementation of tax changes announced in Chancellor Jeremy Hunt’s November 2022 Autumn Statement – tax changes which, if no action is taken to mitigate them, could result in hundreds of thousands of people paying considerably more tax.

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The Autumn Statement delivered by the Chancellor focussed on “rebuilding our economy”, but the tax threshold reductions set forth will be an unwelcome hit to investors’ efforts to grow their hard earned capital amidst an already challenging investment landscape. 

As a reminder, the Chancellor announced the additional-rate income tax threshold will be reduced from £150,000 to £125,000. This will result in an extra 250,000 people in the UK paying the top rate of tax, whilst those already earning £150,000 or above per year will pay an extra £1,200 in tax annually. 

In addition, the Capital Gains Tax (CGT)-free allowance will be reduced incrementally from £12,300 to £3,000 – its lowest figure since 1981 – by April 2024, and the dividends tax allowance will fall from £2,000 to £500 by the same date. 

However, one allowance which will remain unchanged come 6th April 2023 is the annual ISA allowance – which will once again reset to £20,000 – and utilising this allowance could be crucial for mitigating the impacts of the impending changes to taxation.


Mitigating tax changes and maximising potential returns using your ISA allowance

The core advantage of an ISA is that all eligible investments held within its tax-free wrapper are not liable for income, capital gains or dividends tax. Whilst one of the key principles of investing has always been to utilise tax-efficient strategies such as that offered by the ISA to maximise any potential returns, this is clearly more important now than ever before.

And when contemplating how to get the most out of your ISA allowance, it’s important to not just consider where you will subscribe your reset allowance once the new tax year begins, but to also act now with regards to any remaining 2022/23 allowance before it’s gone (as remember: any unused ISA allowance cannot be carried over into the new tax year). 

With the tax-efficient benefits of an ISA clear, the question for many investors revolves around which ISA is best for them. This is dependent on a number of factors, including your appetite for risk, investment preferences and investment goals. 

Over the past several years investors have witnessed significant turbulence, whether that was plummeting cash interest rates alongside soaring inflation or severe volatility within the equities market. This has served to highlight the potential of alternative investments – those uncorrelated with both inflation and equity markets – in combating volatility within a diversified portfolio. Here, the Innovative Finance ISA (IFISA) becomes a crucial consideration for experienced investors. 

The introduction of the IFISA to the ISA market in April 2016 opened the tax wrapper up to alternative investments for the first time, and as alternatives continue to grow in popularity, shielding them from income tax and CGT in an IFISA where possible could save investors a significant tax bill and aid in maximising target returns. 

Among the IFISA-eligible assets are property bonds, which could be an attractive method of investment into the popular asset for a multitude of reasons, including their hands-off nature and the potential to target returns often circa 9% completely tax-free. 

When considering that to achieve this rate outside of a tax-free wrapper additional-rate taxpayers – of which many more people will become as of 6th April 2023 – would need to target a Gross Equivalent Return of 16.4%, the potential of IFISAs to aid in mitigating the erosion of capital growth and maximise returns is clear.


Maximise your 2022/23 ISA allowance before it’s gone 

The end of the tax year is now just weeks away, therefore it’s crucial to ensure that, where possible, you’ve utilised your 2022/23 ISA allowance to its maximum, as well as beginning to consider how you’ll subscribe your reset 2023/24 allowance to help offset taxation changes. 

What’s more, it’s important to also reassess your wider ISA portfolio and past subscriptions at this time, and making use of ISA transfers can help to rebalance your ISA portfolio where needed and ensure your past allowances are still working hard to meet your goals.