As one tax year ends and another begins it is important that savers take full advantage of the tax-free savings offered by the annual ISA allowance.
Although the Government has once again frozen the allowance for another year at £20,000, savers should arrange their income to make full use of these tax-advantageous saving schemes – even if many of the products on the market offer marginal rates of interest.
From 6 April, a saver’s ISA allowance will be reset for the new tax year. Unlike other forms of tax allowance, the ISA allowance from the previous tax year does not roll over to the new tax year.
You can save up to £20,000 in one type of account or split the allowance across some or all of the other types. However, you can only pay £4,000 into your Lifetime ISA in a single tax year.
There are five types of ISA:
Cash ISAs – A standard savings account where there is never tax to pay on interest earned. There are several types of ISA including, easy-access cash ISAs, notice cash ISAs and fixed-rate cash ISAs which offer different levels of access to the saver. Interest rates on many ISAs at this time are exceptionally low.
Stocks & Shares ISAs – This type of ISA allows you to invest money in funds, bonds and shares. These allow investors exemption from capital gains tax (CGT), bond interest tax and dividend income tax. However, there is a greater risk involved as savings are not protected from losses, and these accounts are usually seen as long-term investments (at least five years in most cases).
Lifetime ISAs (LISA) – Unlike other ISAs, there is an allowance limit of £4,000 per year for a LISA, to which the Government adds a 25 per cent bonus for each month savings are deposited. A LISA is open to savers aged between 18-39 and you can only withdraw if you are buying a first home or are aged 60 or over.
Innovative Finance ISAs – Companies who offer IFISAs lend your money to borrowers and businesses with the interest earned added to your account. Where a borrower is unable to pay you back the money saved the saver is not be protected.
Junior ISAs – A junior ISA allows you to save or invest up to £9,000 for your child. This is separate from your own £20,000 limit. Children are unable to touch the money until they turn 18. Paying your income into a Junior ISA could help you to reduce your overall income tax burden with careful planning.