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

Three reasons to use your £20k ISA allowance this tax year more than any other

Written by:
Savers and investors have until 5 April to make the most of their £20,000 annual ISA allowance. But this tax year more than ever, there’s more reason to make the most of this limit.

Individual Savings Accounts (ISA) are products where you don’t pay any tax on interest, income or earnings from them.

Adults have a £20,000 annual allowance for the current 2022/23 tax year which can be split between cash, stocks and shares, Innovative Finance ISAs and Lifetime ISAs.

While the tax-free incentive alone is reason enough for people to hold ISAs, this tax year more than ever, there’s more reason to make the most of this by the 5 April 2022 deadline before you lose this allowance forever.

Here are three reasons:

1) Personal Savings Allowance (PSA)

The Personal Savings Allowance (PSA) allows for savings earned in banks, building societies, peer-to-peer lending, Government or company bonds and credit unions to be paid out without tax up to a certain limit based on your marginal rate of income tax you pay.

Basic rate taxpayers can earn £1,000 in savings interest tax-free each year, while higher rate taxpayers can earn £500. Additional rate taxpayers don’t receive a PSA.

At launch in 2016, the PSA was expected to take 95% of taxpayers out of paying any tax on their savings.

But over the past year, savings interest rates have been rising – and at pace – following 10 consecutive Bank of England base rate hikes since December 2021.

This essentially means savers need less money in best buy deals to breach the PSA.

The current top paying one-year bond offers 4.3% (Atom) which means a basic rate taxpayers would breach the £1,000 PSA with a deposit of £23,256. For those paying 40% tax, they would breach the £500 PSA with just £11,628, according to Savings Champion calculations.

By comparison, in August 2022, basic rate taxpayers could hold £35,000 in the then best buy one-year bond paying 2.85%, (£17,500 for higher rate taxpayers), while in August 2021, the top paying one-year bond offered 1.1%. This meant a basic rate taxpayer would overshoot their PSA of £1,000 only with a hefty deposit of £91,000 – four times as much in holdings compared to now.

One way to protect your cash from the tax man is to use up as much of your £20,000 annual ISA allowance, as it remains tax-free year after year.

2) Capital Gains Tax (CGT)

CGT is a tax on profit when you sell an asset that has increased in value, such as property that’s not your main home or shares outside of an ISA or PEP. It’s paid by a relatively small number of people, with figures revealing 323,000 taxpayers were caught in the net in 2020/21. However, in January 2023 alone, CGT reached a record high of £13.2bn, a 24% increase in the year.

The annual exempt allowance is currently £12,300 (£6,150 for trusts), with profit above this being taxed up to 28%.

However, the annual exempt amount for Capital Gains Tax will be more than halved from the current £12,300 to £6,000 in April. It will then be slashed again to £3,000 from April 2024.

This will be a challenge for buy-to-let landlords, and investors, but Alice Haines, personal finance analyst at Bestinvest, says: “Anyone who may have made substantial capital gains on their investments outside tax wrappers and has some of this tax year’s ISA allowance left should consider selling up now while they still have the £12,300 tax-free allowance to utilise.

“If the investments are held jointly with a spouse, it means you have £24,600 to use up this tax year – as opposed to the £12,000 in total at your disposal from April 6.”

3) Dividend Tax

The dividend allowance is an extra tax-break which applies to funds or shares that are held outside of a pension or an ISA.

The amount someone can earn before paying tax on dividends will fall from £2,000 to £1,000 from April.

This means investors with dividend-paying assets held outside an ISA could run the risk of breaching their dividend allowance limit when it halves next year, according to Haines.

She explains that dividend tax on the income investors receive from shares, funds or investment trusts is charged at 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.

“The alternative of holding investments in an ISA lets your money compound and grow without the risk of taxation”, Haine says.

If you hold investments such as shares, funds, investment trusts or exchange traded funds outside a tax wrapper such as in a General Investment Account or an employee share plan, Haine says “it might make sense to transfer them into an ISA account” via the Bed & ISA process.

This allows investors to sell shares or funds and repurchase them within an ISA to keep future returns out of the reach of tax charges.

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.

Your right to a refund if travel is affected by train strikes

There have been a wave of train strikes in the past six months, and for anyone travelling today Friday 3 Febru...

Could you save money with a social broadband tariff?

Two-thirds of low-income households are unaware they could be saving on broadband, according to Uswitch.

How to help others and donate to food banks this winter

This winter is expected to be the most challenging yet for the food bank network as soaring costs push more pe...

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.

DIY investors: 10 common mistakes to avoid

For those without the help and experience of an adviser, here are 10 common DIY investor mistakes to avoid.

Mortgage down-valuations: Tips to avoid pulling out of a house sale

Down-valuations are on the rise. So, what does it mean for home buyers, and what can you do?

Five tips for surviving a bear market mauling

The S&P 500 has slipped into bear market territory and for UK investors, the FTSE 250 is also on the edge. Her...

Money Tips of the Week

Privacy Preference Center