Are you getting the most out of your ISA allowances?

Against a backdrop of reducing tax allowances, the use of the annual ISA allowance for UK tax residents could be an important tool as part of your tax-efficient financial planning strategy. Peter Webb, Head of Tax Advisory at The Fry Group runs us through the different types of ISAs available for adults and juniors.

ISAs for adults

The overall ISA contribution limits for adults for the 2023/24 tax year remains unchanged at £20,000 – but if you’ve not used it by 5 April 2024, you’ll lose it!

Cash ISA – a savings account that allows you to earn interest on your cash savings without having to pay Income Tax on the interest earned. With interest rates on the rise, now is a good time to consider opening a Cash ISA to take advantage of this opportunity to earn interest on your savings. With tax allowances and tax bands frozen for this tax year, using an ISA to keep your interest tax free is an easy win. Top cash ISAs in the market at present offer up to 3.35% easy access, or up to 4.28% fixed.

Stocks and Shares ISA – think of this type of ISA as an ‘Investment ISA’ where you can invest in funds, bonds and shares in individual companies – the benefit being that you don’t pay any tax on dividends, interest or capital gains from investments held in your Stocks and Shares ISA. From 6 April 2024 your tax-free dividend allowance reduces to just £500 and your Capital Gains Tax annual exemption will be further reduced to just £3,000.

Lifetime ISA – Individuals must be aged within 18-39 to set up a Lifetime ISA. You can contribute up to the age of 50, and it’s a vehicle that can be used for two specific things 1) purchasing your first home, costing up to £450,000, or 2) your retirement. You can invest up to £4,000 a year into your Lifetime ISA which becomes £5,000 with the government top-up of £1,000 (25%). If you choose to use your Lifetime ISA for retirement income, you can draw that down from the age of 60, otherwise the funds can only be used towards the purchase price of your first property.

Innovative Finance ISA – this type of ISA is for peer-to-peer lending, instead of cash or stocks and shares – essentially providing individuals with the opportunity to lend their money as loans to small businesses and individuals, without a bank as the intermediary.

It’s important to note that you can split your annual ISA allowance (£20,000) across these four types of ISA within a tax year – although remember that the maximum contribution to a Lifetime ISA is £4,000 each tax year.

ISAs for juniors

By starting to save early and teaching children about the tools available to do this, you can help put your children on the path to a solid financial future. Junior ISAs allow you save and invest on behalf of a child under the age of 18. And with no tax on the earnings, the money you put away can grow even faster, and can be a great way to provide a legacy for their future.

Junior Cash ISA – A Junior ISA can only be opened by the child’s parent or legal guardian, and the child must be under the age of 18 and a UK tax resident. The money in the account belongs to the child, and they can start managing their own account from the age of 16. The money is held until the child turns 18, at which point their account is automatically rolled into an ‘adult Cash ISA’ where they can choose to withdraw money or keep it where it is.

Junior Stocks and Shares ISA – this type of ISA emulates that of the adult version where you can invest your child’s savings into investments like funds, shares and bonds. Any profits gained will be free from tax.

It’s possible for your child to have a Junior Cash ISA, Junior Stocks and Shares ISA, or both. The annual contribution limit for Junior ISA’s is £9,000 for the tax year 2023/24, and no tax is payable on interest or investment gains. If you choose to hold both of these ISAs for your child, the annual contribution limit remains the same at £9,000.

16–17-year-olds can also contribute to the adult equivalent of an adult Cash ISA (up to £20,000 for the tax year 2023/24) as well as their Junior ISA.

The right type of ISA for you depends on your circumstances, attitude to risk and your age. For help with making the best use of your available allowances, or any other aspect of your tax planning, please contact your nearest office.