Your ISA allowance: Use it or lose it before 5th April

Your ISA allowance: Use it or lose it before 5th April

The end of the tax year is rapidly approaching and it’s time to think about taking advantage of your ISA allowance before 5th April 2023.

Let’s take a quick look at how you can maximise the tax-saving benefits of your ISA investments – and make your money go further this year.

Protect your income from tax using ISAs

ISAs (or Individual Savings Accounts) can be used to effectively shelter your income from tax, helping you to achieve your financial goals.

Any money you deposit into your ISA or ISAs is free of any further liability to Income Tax or Capital Gains Tax (CGT). This means there’s no tax on your interest, withdrawals and any profits your income might make.

To keep things fair, the Government caps the amount that you can put into your ISA or ISAs in any tax year. This tax year (2022/23) the ISA allowance is set at £20,000, which means you have until 5th April 2023 to contribute to any of your ISAs and enjoy those tax-saving benefits.

Your UK ISA allowance for 2023

This is a “use it or lose it” situation because your £20,000 annual ISA allowance does not roll over into the next tax year.

Here’s what using your ISA allowance before 5th April could look like…

Say you had £17,000 in a cash ISA and £5,000 in a regular savings account. You intend to invest some or all of that £5,000 into your ISA in the near future.

  • Option 1: You deposit £3,000 into your ISA before 5th April 2023, hitting your 2022/23 ISA allowance limit. In early May, you put the remaining £2,000 into your ISA – which means you’ve got £18,000 still to invest in your ISA(s) over the 2023/24 tax year.
  • Option 2: The end of the tax year rolls around without you depositing any more into your ISA, which remains at £17,000. In early May, you invest your £5,000 into your ISA. This means you only have £15,000 of your yearly ISA allowance over the 2023/24 tax year.

Of course, you don’t need to be investing thousands to benefit. By popping £500 into a Cash ISA before the 5th April, you can still ensure that income is protected from Income Tax or CGT.

Flexible ISAs can allow you to move money around

ISAs have become a great deal more flexible recently, allowing you to invest and withdraw cash easily – without it affecting your annual allowance.

Depending on your personal financial circumstances, it may be a wise move to move money in or out of your ISA(s) to make the most of your income. If you were to move £2,000 from a Cash ISA to a Stocks and Shares ISA, this would not affect your annual ISA allowance.

If you’ve got additional income sitting in a current account, it may be worth moving it to an ISA before 5th April if you’ve not yet exceeded your ISA allowance. With the flexibility of many ISAs, you needn’t be locked into this financial decision; you could always withdraw cash at a later date*.

It’s worth being aware that not all ISAs offer this level of flexibility; some, like Lifetime ISAs, actually have strict rules around withdrawing cash once you’ve invested it**. Check with your provider if you’re unsure of what you can do with your ISA.

Consider making use of different types of ISA

You can open as many types of ISAs as you like, as long as you meet the eligibility criteria for them.

While not everyone needs or can make use of every type of ISA out there, it’s worth considering which ISAs work best for you as we approach the end of the tax year.

Not including Junior ISAs (more on those later!), there are four types of ISAs:

  • Cash ISAs
  • Stocks and Shares ISAs
  • Innovative Finance ISAs
  • Lifetime ISAs

While you can open as many different types as you like, you can only pay into one of each type in a single tax year. Your ISA allowance limit covers all ISAs you have open; for example, you can’t invest £15,000 into a Cash ISA and £10,000 into a Stocks and Shares ISA.

Capitalise on the benefits of your Lifetime ISA

A Lifetime ISA (ISA) is designed to support first-time home buyers and those saving for retirement.

An ISA can be opened by anyone aged between 18 and 39 and unlike other ISAs, it has its own contribution limit. You can use it to save up to £4,000 a year towards either a first home*** or for retirement – and the government will contribute 25% of whatever you save within a single tax year.

That means that if you were to save £4,000 into your ISA in a tax year, the state adds a bonus £1,000. You’re only allowed to put £4000 in every tax year, so you may as well top it up as much as possible before the limit resets on the 6th April.

However, it’s worth remembering that you’ll face a 25% charge levied against your withdrawal amount if you need to access the cash before you’re 60 (if you’re not using the money to buy your first property).

Top up your Junior ISA

A Junior ISA (or Junior Individual Savings Account) are typically set up to save for a child’s future.

Like adult ISAs, no tax is payable on interest or investment gains, which can be very handy for making your money go further. Unlike regular ISAs, they have an annual investment limit of £9,000; although that limit resets at the end of the tax year like any other ISA.

The contributions you or your family make to a child’s Junior ISA don’t count under your annual ISA allowance. That means if you’ve got £20,000 invested across numerous ISAs, you can still contribute up to £9,000 to a Junior ISA.

But as with all other ISAs, the deadline to make the most of that yearly limit is rapidly approaching. Read more about Junior ISAs and find out whether this type of ISA could work for you and your family.

Use your ISA allowance before tax year end

As the end of the tax year comes round, now is the time to make use of your annual £20,000 tax-free ISA allowance.

As always, it’s always worth remembering when putting money in an ISA that the value of your investment can fall as well as rise – you’re not 100% guaranteed to grow your income.

However, ISAs are still a fantastic savings and investment option for many people. If you’re interested in learning how you can make best use of your ISA or ISAs before the 5th April, you can speak to our team of friendly advisors.

* An investment style ISA (such as a Stocks and Share ISA) would typically have an investment time horizon of 5 years. Taking money out earlier than this could result in a loss of capital due to costs and charges; speak to your provider of financial advisor for clarification if you’re not sure.

** If you make a withdrawal from a Lifetime ISA in future tax years, you’ll face a 25% charge levied against your withdrawal amount, except where you are aged over 60 or where you use the withdrawal to buy your first property.

***  You can use your LISA to purchase a home if you’re a first-time buyer purchasing a home that’s £450,000 or less.