You are here: Home - Saving & Banking - News -

Five reasons to use your ISA allowance

Written by:
The maximum ISA limit is £20,000, which is a lot of money for the average saver. But there are plenty of reasons to use as much of it as possible.

The government increased the ISA allowance to £20,000 in the last tax year, the most generous level since the savings product was launched 20 years ago.

This means you can save or invest up to £20,000 into a cash or stocks and shares ISA and you won’t pay a penny of tax on anything you earn.

Around £69bn was put in adult ISAs in the 2017/18 tax year, an increase of £7.8bn compared to the year before, government figures show. But the average person is saving just £6,409 a year, well below the annual allowance.

While saving £20,000 a year is out of reach for many people, there are good reasons to increase the amount you put in an ISA if you have any spare cash in your bank account.

Here, senior wealth planner at Sanlam UK, Carl Drummond, shares his top five reasons:

  1. If you don’t use it, you lose it – If you don’t use your ISA allowance in a given tax year, it’s gone. So, even if you don’t want to invest in a stocks and shares ISA today, you could put money into a cash ISA, and move it into a stocks and shares ISA in the future if you prefer.
  2. Interest from ISAs doesn’t impact your personal savings allowance (PSA) – If you’re a basic-rate tax payer, you can earn up to £1,000 in interest a year tax-free. If you’re a higher-rate tax payer, that reduces to £500. The good news is that any interest earned within an ISA doesn’t count towards this allowance.
  3. The tax-free allowance makes a big difference – Any capital gains you make in excess of £11,700 a year are subject to capital gains tax (CGT). This is 20% for higher-rate tax payers and 10% if you’re a basic-rate tax payer. Returns on a stocks and shares ISA are protected from CGT, and it makes a big difference. If, for example, you invest £20,000 at the start of each tax year for the next 10 years and achieve an average return of 5%, you will make a gain of £64,136. If you then withdraw that money in one lump-sum, say for building work or buying a new property, you would pay £10,487 in CGT if you’re a higher rate tax payer. An ISA wrapper protects you from that.
  4. Sheltering your portfolio from dividend tax – Last year, the dividend tax allowance reduced from £5,000 to £2,000 a year. Even if your portfolio isn’t yet yielding £2,000 in dividends, you can protect yourself from future tax by ensuring those investments are held within an ISA tax wrapper now. If you’re a business owner and you pay yourself dividends, this becomes even more important as it all counts towards the same dividend tax allowance.
  5. Don’t forget about the junior ISA – You can also shelter up to £4,260 in a junior ISA this tax year. You will never be able to access these savings, and the child can only access it at the age of 18 years old, but it’s a good way of gifting money and not paying any tax on the returns.

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

The savings accounts paying the most interest

If one of your jobs this month is to get your finances in order, moving your savings to a higher paying deal i...

Everything you need to know about being furloughed

Few people had heard of ‘furlough’ before March 2020, but the coronavirus pandemic thrust the idea of bein...

Coronavirus and your finances: what help can you get in the second lockdown?

News and updates on everything to do with coronavirus and your personal finances.

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

Having a baby and your finances: seven top tips

We’re guessing the Duchess of Cambridge won’t be fretting about maternity pay or whether she’ll still be...

Protecting family wealth: 10 tips for cutting inheritance tax

Inheritance tax - sometimes known as 'death tax' - can cause even more heartache for bereaved families. But th...

Travel insurance: Five tips to ensure a successful claim

Ahead of your summer holiday, it’s important to make sure you have the right level of travel cover or you co...

Money Tips of the Week

Privacy Preference Center





Read previous post:
VIDEO: Back to basics – which ISA is right for you?

Should you open a cash ISA, an investment ISA, or maybe one of each? We help you decide.