With the end of the tax year on 5 April fast approaching, now is the perfect moment to get on top of your finances.

Individual Savings Accounts (ISAs)

ISAs are a well-known way to save and invest, with two key tax benefits:

  • Any income and investment gains within an ISA are free from Income Tax and Capital Gains Tax (CGT) respectively. You can keep all of the returns, and the taxman gets nothing. There’s no upper limit on this either. Whereas pensions (for example) have a Lifetime Allowance limit on some of their tax benefits, there is no equivalent for ISAs.
  • You can withdraw completely tax-free from ISAs at any time for any reason, if needed.

These tax advantages can be inherited by a surviving spouse or civil partner, and it is also possible to hold assets within ISAs that might qualify for Inheritance Tax reliefs. This can make ISAs even more appealing to some.

There are two main types of ISAs: first there are the Cash ISAs offered by banks and building societies and then there the Stocks and Shares ISAs that typically provide access to a great variety of investment opportunities.

If you can take a long-term view, Stocks and Shares ISAs have the potential for higher returns, especially considering current interest rates on cash. Taking a holistic view of your wealth can be worth it: ask yourself whether any Cash ISAs you have are the best use of those key ISA tax benefits.

This tax year every adult (over age 18) in the UK can invest up to £20,000 into either a Cash ISA or a Stocks and Shares ISA (or a combination of the two), minus any amount paid into a Lifetime ISA (see below). Those with more to invest will have another £20,000 ISA allowance available from 6 April.

Finally, it is worth noting that those aged 16 and 17 can contribute to a Cash ISA (but not a Stocks and Shares ISA), but the Cash ISA can be transferred into a Stocks and Shares ISA upon reaching adulthood.

Lifetime ISAs

Lifetime ISAs are designed to encourage saving for a first property purchase (specific criteria apply, including that the property must be bought for less than £450,000) or saving for the period after you turn 60, or both.

As with standard ISAs, Cash and Stocks and Shares versions are available to suit your needs. Particularly if you are saving for retirement, you should consider the potential for higher returns through investing, and whether a Lifetime ISA might even be better than a pension.

This tax year adults living in the UK below the age of 50 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. If you’re in your 40s though, there’s a catch: you needed to be under age 40 when you opened your first Lifetime ISA, otherwise you cannot contribute now.

The provider of your Lifetime ISA will then automatically claim a 25% government bonus (up to a maximum of £1,000) and add this to your Lifetime ISA, on top of your contribution. This bonus can help you get onto the housing ladder or bring your eventual retirement a little closer, relative to contributing to a standard ISA instead.

As with other ISAs, any income and investment gains are free from Income Tax and CGT. However, unlike a standard ISA, a 25% exit penalty is activated if you make withdrawals that do not meet those specific criteria for tax-free withdrawals.

Junior ISAs

Contributing to a Junior ISA on behalf of children up to age 18 can give them a financial head start when it comes to their adult life.

Money contributed to 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. This means a Junior ISA can be used to pay for university, a wedding or a first property, or it can even remain invested towards retirement.

As with adult ISAs, Cash and Stocks and Shares versions are available, though it is only possible to have one of each at any given time. Income and investment gains within a Junior ISA are tax-free, and as ever it is worth thinking carefully about the potential for better returns through investing.

A parent or legal guardian must open the Junior ISA, but thereafter anyone can contribute on the child’s behalf. 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.

It can come as a surprise to know that 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 has moved abroad. This is not true for all other types of ISAs, which can only be contributed to by UK residents.

Finally, the most eagle-eyed amongst you may have noticed another wrinkle in the rules. A high-earning 16 or 17-year-old can pay £20,000 into an ‘adult’ Cash ISA and a further £9,000 into a Junior ISA. Or, if they are too busy studying for their A-Levels, others can do this on their behalf.

A quick note on Child Trust Funds

Child Trust Funds (CTFs) were a predecessor to Junior ISAs, and all children born between 1 January 2002 and 2 January 2011 will have a CTF or have had one in the past (if one wasn’t opened by parents or legal guardian, the government will have opened one on their behalf in order to pay in government cash vouchers of between £250 and £500).

CTFs work in a broadly similar way to Junior ISAs and have the same £9,000 contribution limit, though confusingly the limit is between a child’s birthdays and not aligned with the tax year. However, these often either have a lower interest rate (for cash versions) or offer a narrower range of investments with higher charges (for investment versions).

Children who still have a CTF cannot open a Junior ISA, unless they transfer their CTF across to a Junior ISA, which can often be worthwhile. The CTF contribution limit being aligned with the child’s birthdays means that, in some cases with careful advice and planning, it is possible to pay in 3 lots of £9,000 in a tax year.

ISAs all around

If you have made the most of your ISA allowance and have more to save or invest, do consider the ISA allowances of the rest of your family. Many like to use ISAs, Lifetime ISAs and Junior ISAs to pass money from generation to generation, using all of these to put future returns beyond the reach of the taxman, with their gifts also often saving Inheritance Tax along the way.

Bear in mind that, even if you are too old to qualify for a Lifetime ISA yourself, all may not be lost if your children or grandchildren, for example, could benefit from those government bonuses and a leg up onto the housing ladder or towards retirement.

Get in touch

Please remember that all ISA allowances operate on a use it or lose it basis. So, if you want to make the most of the above allowances, it is best to do so before 5 April 2022.

Not sure about all the different ISAs yet, what to invest into within these, or where ISAs should fit within your wider planning? Our experienced financial planners deal with these questions and many others on a daily basis and are well placed to help, so do not delay getting in touch.

 

This note is for general guidance only and does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell, or otherwise transact in any investments. It represents our current understanding of law and HM Revenue and Customs practice as at 07 March 2022. We cannot assume legal liability for any errors or omissions and detailed advice should be taken before entering any investment activity. Please note that levels and reliefs of taxation depends on the individual circumstances of each clients and are subject to change. 

About The Author

John Hill
John joined Saunderson House in 2011 after graduating with a first-class honours degree in European Social and Political Studies ...
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