You have until 5 April 2023 to make the most of your ISA allowance for the current tax year. If you want to boost your savings or investments, adding more to your ISA could make sense.
For the 2022/23 tax year, you can add up to £20,000 to adult ISAs. The allowance is for each individual. So, if you’re planning with a partner, you should consider making use of both of your allowances.
ISAs are a popular way to save and invest. According to government statistics, around 12 million adult ISAs were subscribed to during the 2020/21 tax year. In total, the cash value of ISAs stood at around £687 billion.
If you’ve yet to make use of your ISA allowance for the 2022/23 tax year, here are four reasons you should review your deposits.
1. You could access a higher rate of interest with a Cash ISA
If you’re building up your savings, using a Cash ISA could mean you benefit from a higher interest rate when compared to regular savings accounts.
As interest rates increased throughout 2022, it’s a good time to review if your Cash ISA is still competitive. There may be an alternative provider that offers a higher rate.
You could also choose an ISA with a fixed term in return for a better rate. However, you may not be able to withdraw your savings during the term, so it’s important to consider what you’re saving for.
If you don’t have a Personal Savings Allowance (PSA) because you’re an additional-rate taxpayer or you’ve exceeded your PSA for the current tax year, a Cash ISA can also be beneficial for tax purposes. Interest earned on cash held in an ISA isn’t liable for Income Tax.
2. ISAs offer a tax-efficient way to invest
For investors, Stocks and Shares ISAs can be tax-efficient. You don’t need to pay Capital Gains Tax on investment returns when investing through an ISA. As a result, it can reduce your tax liability and help your money go further.
As with any investment, you should invest through an ISA with a long-term time frame and understand what level of risk is appropriate for you.
3. If you save with a Lifetime ISA, you could benefit from a 25% bonus
A Lifetime ISA (LISA) isn’t the right option for everyone, but it can be valuable in some circumstances, including if you’re saving to buy your first home.
You must be aged between 18 and 40 to open a LISA and you can contribute until you are 50. You can deposit £4,000 in the 2022/23 tax year and receive a 25% government bonus. In effect, it means you could benefit from £1,000 of “free money” each year.
However, you will face a 25% charge if you make a withdrawal or transfer the money to another type of ISA before you’re 60 for a purpose other than buying your first home. This means you could lose the bonus plus some of your original savings. So, you should think carefully about what you’re saving for and the alternatives before you use a LISA.
You can choose a Cash LISA to earn interest on your deposits or a Stocks and Shares LISA if you want to invest.
4. If you don’t use your ISA allowance, you will lose it
Finally, you cannot carry any unused ISA allowance into a new tax year. If you don’t use it before the 5 April 2023 deadline, you’ll lose it. So, reviewing your saving or investing plans now with this in mind can help you get the most out of your ISA allowance.
Should you use your ISA allowance to save or invest?
While a Cash ISA can seem like the “safer” option, as your money isn’t exposed to investment risk, inflation can erode the value of your savings over time. As a result, you should consider if saving or investing is right for your goals.
A report in FTAdviser suggests that UK savers storing money in Cash ISAs are experiencing wealth erosion at the fastest pace in more than four decades. This is due to high levels of inflation, which interest rates aren’t matching. The report estimates that when compared to inflation, savers are facing a gap of £26.7 billion.
In contrast, investing could help the value of your savings keep up with inflation. However, returns cannot be guaranteed and investing isn’t always the right option.
It’s important to set out your goals and how far away they are to understand if saving or investing could be right for you.
Contact us to talk about how to use your ISA allowance
If you want to talk to a financial planner about how to get the most out of your ISA allowance, please contact us.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA.
The favourable tax treatment of ISAs may be subject to changes in legislation in the future.