Utilise your ISA allowance at the start of the financial year to maximise tax-free potential

March is seen as the peak of the Individual Savings Account (ISA) season. More money is invested into the investment markets during the last quarter of the tax year than at any other time, as savers rush to make tax efficient savings.

Although some investors may not have funds available until the end of the tax year, there may be benefits in investing at the beginning of the tax year (from 6 April 2022). Disruption to spending habits caused by the pandemic and various lockdowns may mean that there are opportunities available before and after 5 April to maximise tax efficient investing; there could be some pent-up spending in the economy which could potentially drive investment markets forward.

What is the annual ISA allowance?

– £20,000 for adults, of which £4, 000 can be invested in a Lifetime ISA (if eligible)

– £9,000 for children in the form of a Junior ISA (16-17-year olds can have a cash ISA of £20,000 in addition)

The allowances outlined above are granted on tax year basis (6 April to 5 April), and if the full allowance is not utilised in one year, then it will be lost. Ideally, to ensure you make use of the entire allowance each tax year, ISA investment needs to be made by the end of March. Although it is possible to make an ISA investment online up to midnight on 5 April, individuals should be cautious due to possible overloaded systems crashing, or, as in this year, a bank holiday limiting access to advice.

Other benefits of investing in an ISA include there being no income or capital gains tax paid on the income and growth. Furthermore, an ISA can effectively be transferred to the remaining spouse upon death. This means the surviving partner can continue to invest these savings in a tax-free environment alongside their own ISA allowance, as long as the extra allowance is claimed within three years of the date of their partner’s death.

Surplus income due to the pandemic?

It has been estimated by The Bank of England that in 2020, UK savers added an extra £125 billion to their savings compared to 2019. This may be due to lack of spending opportunities, enabling individuals who have been able to continue working throughout the pandemic to build up surplus income. By investing some of those surplus savings into an ISA early in the 2020/21 tax year, the investor will be able to enjoy tax free dividends and growth for the whole year. Many ISA providers will accept back-to-back ISA subscriptions in March under one application process.

Also, for those aged between 18 and 39, starting to save in a Lifetime ISA at the beginning of the tax year means receiving the Government bonus of 20% of your savings (up to £1,000 a year) slightly sooner. A Lifetime ISA can be used against the purchase of your first home, read more here.

Stocks and shares ISA – should I be worried about volatile markets?

If you are a saver who is nervous about investing in stocks and shares, and you would like to invest your funds long term, try not to focus too much on short term volatility in share prices, as these tend to even out over time. Attempting to time investment to achieve the best price is very difficult. It is less likely to contribute to the overall returns achieved than steadily accruing dividends and growth over the long term within a tax-free environment.

Can I start small with my investment?

Cautious investors could invest this year’s allowance in a stocks and shares ISA before the tax year end, but phase in the purchase of investments over a longer time frame. Once money is in an ISA, it qualifies for ongoing tax-free investment, but does not all need to be invested in the market at once; part of the initial investment can be held in a cash account.

The cash account facility within a stocks and shares ISA doesn’t pay very much interest, if any, and may incur charges, but having the funds available within the ISA makes it possible to move into the investment markets overnight.

Money invested in a cash ISA may pay more interest and may have lower charges, but it can take up to 15 days to transfer to a stocks and shares ISA, so this would be a less agile option.

New tax year, new me?

By starting your ISA savings towards the beginning of the tax year, small deposits of funds into the market can be achieved. Over the medium to long term, this may also help to smooth out the ups and downs of stock market returns. A regular direct debit payment can be arranged so that you do not risk missing out on the full potential of tax-free savings by forgetting to add to the ISA each tax year.

For tailored advice regarding your personal situation, ISAs and utilising your tax free allowances, speak to our wealth management team (01254 679131 / wealthmanagement@pmm.co.uk).

 

This blog is for general guidance only. Recipients should not act upon any of the information provided without seeking specific professional advice tailored to your circumstances, requirements or needs. Please contact PM+M before making any decisions based on any matters relating to this blog. Please note the value of your investment can go down as well as up and you may not get back the full amount you invested. PM+M Wealth Management is authorised and regulated by the Financial Conduct Authority.

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