How To Make The Most Of Your ISA Allowance

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The arrival of a new year means that people in the UK have essentially three months to use up any tax allowances they still have. If you haven’t used up your full ISA allowance, you should make it a priority to do so, if you can. Here is a quick guide to help.

The basics of ISAs

As it stands, there are five kinds of ISA in total. These are:

Junior ISAs

Cash ISAs

Lifetime ISAs

Stocks and Shares ISAs

Innovative Finance ISAs

You can have as many different types of ISA as you wish provided that you meet the qualifying criteria. You can, however, only have one ISA of each type (per year). Your ISA allowance is for all the ISAs you hold (not per product). Some ISAs have their own (lower) limits on how much you can save in them.

Junior ISAs

Junior ISAs can be opened from birth up until a person’s 18th birthday. They can be held until a person’s 18th birthday. The savings limit on Junior ISAs is £9K per year. When the child turns 18, the money in a Junior ISA becomes the named holder’s outright. Anything not withdrawn will be transferred automatically into an adult ISA.

The advantage of Junior ISAs is that they can be a very tax-efficient form of saving. There are, however, two potentially significant disadvantages to them. The first is that money put in a Junior ISA is locked away until the holder turns 18. There is no way for the contributing adults to recoup gifts if they need them (or the child does).

The second is that as soon as the child turns 18, the money becomes theirs outright. They can spend it as they wish. If you’re not convinced that your child can handle that responsibility, then you should leave Junior ISAs well alone.

Cash ISAs

Cash ISAs can be opened from a person’s 16th birthday. They can be held indefinitely. Whilst there is no specific maximum limits for how large a Cash ISA can grow to, there is an annual subscription limit of £20k. Cash ISAs are essentially tax-free savings accounts. There are no real drawbacks to them other than the fact that their returns are highly unlikely to beat inflation.

The fact that people aged 16 and 17 can hold both Junior ISAs and Cash ISAs means that they can potentially save up to £29K per year.

Lifetime ISAs

Lifetime ISAs (LISAs) can be opened from the age of 18 to the age of 39 (inclusive). You can save up to £4000 a year in them. This money then attracts a 25% government bonus, which is paid annually. The bonus continues to be paid on all new annual subscriptions until the holder reaches the age of 50.

Money saved in a LISA is intended for use to buy a first property and/or to fund retirement. Retirement savings can only be withdrawn when the holder reaches the age of 60. Money can be withdrawn for other purposes but withdrawals are subject to a penalty.

The government bonus can make LISAs a very attractive option if you’re saving for a deposit. Using LISAs as a way to save for retirement is, however, a very grey area. If you’re interested in this, it’s highly advisable to get advice from a financial professional.

Stocks and Shares ISAs

Stocks and shares ISAs can be opened from the age of 18 and held indefinitely. As with Cash ISAs there is no maximum savings limit that the investment can grow to, there is an annual subscription limit of £20k. As the name suggests, Stocks and Shares ISAs are places to hold stocks and shares.

When equities are held in an ISA, the income they produce is sheltered from tax. The only downside to Stocks and Shares ISAs is that there may be restrictions on what you can hold. Even so, it’s generally highly advisable to use them as much as you can.

Innovative Finance ISAs

Innovative Finance ISAs can be opened from the age of 18 and held indefinitely. Like Stocks and Shares ISAs there is no maximum savings limit that the investment can grow to, there is an annual subscription limit of £20k. Innovative Finance ISAs provide funds for peer-to-peer lending. As these ISAs are very niche, we suggest speaking to a financial adviser to discuss whether an Innovative Finance ISA is the right option for your circumstances.

For further advice please get in touch

An ISA is a medium to long term investment, which aims to increase the value of the money you invest for growth or income or both. The value of your investments and any income from them can fall as well as rise. You may not get back the amount you invested.

HM Revenue and Customs practice and the law relating to taxation are complex and

subject to individual circumstances and changes which cannot be foreseen.

Tax concessions are not guaranteed and may change in the future. Tax free means the investor pays no tax.”

Approved by the Openwork Partnership on 1/2/23

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