To help you get ahead before 5 April, we’ve put together an end of tax year checklist with our five key areas to consider to make the most of the allowances available to you. Click here to download the full checklist.
ISAs are a great way to save and invest, as any income and/or investment gains within an ISA is free from Income Tax and Capital Gains Tax (CGT) respectively. This means you can keep all your returns, and none goes to the taxman.
Unlike pensions, there is no upper limit on tax-efficient growth within ISAs, and you can withdraw completely tax-free from ISAs at any time for any reason, if appropriate.
The tax advantages of ISAs can now also be inherited by a surviving spouse or civil partner, and it is even possible to hold assets within ISAs that might qualify for Inheritance Tax reliefs, which can make ISAs even more attractive for some.
ISAs come in two flavours – Cash ISAs offered by banks and building societies and Stocks and Shares ISAs that typically provide access to a wide range of investment options.
Stocks and Shares ISAs provide the potential for higher long-term returns, especially bearing in mind current interest rates. So it is often worth taking a holistic view of your wealth and asking whether any Cash ISAs you might have still offer the best use of the valuable ISA tax benefits.
In this tax year, UK residents aged 18 or over can invest up to £20,000 into either a Cash ISA or a Stocks and Shares ISA or a combination of the two, less any amount you contribute to a Lifetime ISA.
Lifetime ISAs are a special type of ISA designed to encourage saving for your first property purchase (set criteria apply, including that the property must cost less than £450,000) or saving for age 60 onwards, or both.
As with standard ISAs, Cash and Stocks and Shares versions are available to suit your time horizon. Especially if saving for retirement, consideration should be given to the potential for higher long-term returns through investing, and whether a Lifetime ISA is better than a pension for you.
In this tax year, UK residents aged between 18 and 49 inclusive can contribute up to £4,000 to either a Cash Lifetime ISA or a Stocks and Shares Lifetime ISA, but you cannot contribute to both and you need to be under 40 to open a new Lifetime ISA.
The Lifetime ISA provider will then automatically claim a 25% government bonus (of up to £1,000) and add this to your Lifetime ISA, on top of your contribution. This bonus can bring getting onto the housing ladder or your eventual retirement that much closer, relative to a standard ISA.
As with other ISAs, any income and/or investment gains within Lifetime ISAs are free from Income Tax and CGT. However, unlike a standard ISA, an exit penalty applies if you make withdrawals that do not meet the specific criteria for tax-free withdrawals.
For the 2020/21 tax year only, due to COVID-19, the exit penalty has been temporarily reduced so that you only lose the government bonus (and any associated growth). If you already have a Lifetime ISA but it’s no longer right for you, then it may be worth considering transferring to a standard ISA before 5 April 2021, before the exit penalty goes back up next tax year.
Junior ISAs are a great way to save and invest on behalf of children up to the age of 18, to give them a financial head start in life.
Money put into a Junior ISA cannot be accessed by the child until their 18th birthday, but it does not need to be accessed then and can simply be rolled over into an adult ISA. A Junior ISA can therefore be used to build a pot to pay for university, a wedding or a deposit on a first property, or even longer-term goals.
As with adult ISAs, Cash and Stocks and Shares versions are available to suit the child’s time horizon, and any income and/or investment gains within a Junior ISA is free from Income Tax and CGT. And, as usual, consideration should be given to the potential for higher long-term returns through investing.
Junior ISAs must be opened by a parent or legal guardian, but once opened, anyone can contribute to a Junior ISA on the child’s behalf.
In this tax year, up to £9,000 can be contributed to either a Cash Junior ISA or a Stocks and Shares Junior ISA or a combination of the two. If you already have a Junior ISA, bear in mind if opening a new one that it’s not permitted to have two Cash Junior ISAs or two Stocks and Shares Junior ISAs, you can only have one of each.
Unlike adult ISAs, if the child was UK resident when the Junior ISA was opened, it is possible to carry on contributing to that Junior ISA even if the child is no longer UK resident.
Finally, some children born before 2 January 2011 may still have a Child Trust Fund instead of a Junior ISA. While these share most of the same tax benefits as Junior ISAs, Child Trust Funds are legacy arrangements that often have higher charges and fewer investment choices, so it is usually worth reviewing whether these might be bettered off transferred to a Junior ISA.
If you have maximised your own ISA contributions, it might be worth considering the ISA allowances of the rest of your family.
Though you may be too old for a Lifetime ISA yourself, and almost certainly too old for a Junior ISA, these can often be perfect for others, like children or grandchildren.
Many like to use ISAs, Lifetime ISAs and Junior ISAs to pass money down the generations, potentially saving future Inheritance Tax by doing so.
It’s important to remember that you can’t carry forward any ISA allowances that you don’t use this tax year, so if you’re planning on making use of the above allowances, don’t delay.
The contribution deadline for this tax year is 5 April 2021, but due to Easter the last working day of this tax year is 1 April 2021.
With several different ISA options available, and different allowances, it’s often useful to get in touch with an adviser to identify which suit your circumstances best.
If you wish to discuss any of the above or wider financial planning, please do not hesitate to get in touch.
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