Individual Savings Accounts (ISAs) are one of the most popular ways to save and invest. The latest official statistics show that 13 million adult ISAs were subscribed to in 2019/20, with Brits contributing around £75 billion to these tax-efficient accounts.
Each year, the annual ISA subscription limit caps the amount you can contribute to your ISA. And, if you don’t use your full allowance, you can’t carry it to the following year and so you’ll lose it.
So, now is your final opportunity to make the most of your ISA in 2021/22. If you’re not sure whether to top up your ISA, here are five compelling reasons that you should make a contribution before 5 April.
1. You’ll benefit from tax-efficient savings
One of the main benefits from saving into an ISA is that it’s a tax-efficient way to boost your wealth.
- Cash ISA – you won’t pay any Income Tax on the interest you receive on your savings
- Stocks and Shares ISA – you won’t pay any Income Tax or Capital Gains Tax (CGT) on any returns your ISA generates.
Considering that, if you’re a higher- or additional-rate taxpayer, you’ll pay CGT at a rate of 20% on any gains you make on non-ISA investments above your annual exemption (£12,300 in 2021/22), the tax status of ISAs makes them a very attractive way to build wealth.
2. You’ll lose your allowance if you don’t use it
Quite simply, if you don’t use your annual ISA allowance, you will lose it. You can’t carry forward any unused allowance to the next tax year.
So, it’s worth maximising the contributions to your ISA if you can. You can contribute up to £20,000 to one or more ISAs in 2021/22, and the subscription limit will also remain at £20,000 in the 2022/23 tax year.
3. You could double your tax-efficient savings if you work as a couple
As the name suggests, ISAs are “individual”, meaning that they can only be opened in a single name.
If you have a spouse or partner, combining your allowance can be a great way of building up tax-efficient savings. Working as a couple means you can make the most of your contributions, and you could save up to £40,000 tax-efficiently as a couple before 5 April.
If you have already maximised your ISA contributions, think about using your spouse or partner’s allowance. And, if you have both made the maximum £20,000 contribution and you have children or grandchildren under the age of 18, consider making use of a Junior ISA (JISA).
In the 2021/22 tax year you can pay up to £9,000 into a JISA for a child under the age of 18, and benefit from the same tax-efficient growth.
4. They are a great way of building wealth if you want to retire early
Under the 2021/22 rules, you can only access your defined contribution pension fund at the age of 55. This is set to rise to age 57 by 2028.
If you wanted to retire earlier than this, you won’t be able to draw on your pension savings. So, being able to draw a tax-efficient income from another source may enable you to retire on your terms.
You won’t pay any Income Tax or CGT on money you draw from your ISAs, meaning they could provide the income you need until you reach the age where you can draw from your pension.
Additionally, pensions can be a tax-efficient way of passing wealth to the next generation, as they typically don’t form part of your estate for Inheritance Tax (IHT) purposes.
So, drawing from your ISAs and savings first, and your pensions later, can be a prudent strategy for paying less IHT on your death.
5. You could get a £1,000 government bonus
If you are aged between 18 and 39 – or perhaps you have children who are that age? – then a Lifetime ISA (LISA) could be a great way to save for a house deposit or for later life.
Individuals under the age of 40 can contribute up to £4,000 to a LISA in the 2021/22 tax year, and all contributions are boosted by a 25% government bonus, as well as any returns the savings generate.
So, paying the maximum £4,000 into a LISA generates a government bonus of £1,000.
Any withdrawals from a LISA before the age of 60 must be used to fund the deposit for a first home, otherwise there is a 25% penalty charge.
A couple saving for a home can each open a LISA and benefit from the government bonus, so could receive up to £2,000 as a bonus each tax year by maximising their savings.
The benefits of a LISA sometimes fly under the radar, but they can be a great way for younger people to save up the deposit for a home.
And, if they already own a home, opening a LISA before the age of 40 means an individual could contribute throughout their 40s, receive a government bonus of 25%, and build up a tax-efficient savings pot to supplement their retirement income after the age of 60.
Get in touch
If you’d like to maximise your ISA contributions before the end of the 2021/22 tax year, please get in touch. Contact us by email at email@example.com or call us on 01189 876655.