How to get ahead for the new tax year
It’s the start of a new tax year – yey! Perhaps not quite as exciting as the traditional new year, but at least there’s no dry January!
In terms of financial planning, it’s an ideal opportunity to get ahead of the game.
Why? Well making sure everything’s in place now avoids any last-minute stresses next March. It also has tangible financial benefits – starting now means you benefit from a full year of tax relief in your ISA.
Your ISA: one idea many varieties…
It’s 25 years since Chancellor Gordon Brown introduced Individual Savings Accounts (ISAs). They were created as a replacement for personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs). Millions of people now use ISAs as a way to build wealth in the most tax-efficient way.
ISAs let you pay in £20,000 tax free per year. They’re readily available, with many options on the market, and reasonably inexpensive to open (some let you start with as little as £1).
But ‘one size fits all’ they are not. Let’s look at which is the right one to suit you:
· Cash ISA
Around £30 billion was paid into Cash ISAs in 2021/22, from around 7 million subscribers.1 One of the main attractions is a stable interest rate (although rising inflation can erode their value over the years).
You can lock in a more attractive interest rate with a Fixed-rate cash ISA, but you can’t touch your money over a set period. A variable rate, meanwhile, means you have easier access to your cash, but these tend to have lower rates of return. Easy-access or instant-access, meanwhile, give you ready access to your cash. Some allow as many withdrawals and deposits as you want over the course of the year, without affecting your overall Annual Allowance (if you make those repayments during the same tax year).
· Stocks and shares ISA
Stocks and shares ISAs offer a greater potential reward than cash because they’re not susceptible to inflation. Around £34 billion was paid in during 2021/11 (from just under 4 million subscribers). 1
These can be a relatively hassle-free introduction to investing. Holders have exposure to a range of funds, exchange-traded funds (ETFs), investment trusts, bonds, and shares, but are exempt from paying capital gains, dividend tax and income tax (providing you stay within the annual allowance). Depending on the product you choose you may also be able to select the specific investments as well. Naturally, there’s a higher potential risk. The value of your ISA can go down as well as up.
· Lifetime ISA
These were launched seven years ago to encourage younger people to save (either for their first home or for retirement). In 2021/22 there were more than 600,000 LISA accounts, paying in around 1.7 billion.
LISAs are for people between 18 and 40 (you can continue to make payments until you’re 50) and invested in a mixture of cash and equities. You can withdraw whenever you want, but there’s a penalty if the money isn’t used for a deposit on your first home or after you turn 60.
One big advantage is the 25% government bonus (up to a maximum of £1,000 per year. Some self-employed people and basic rate taxpayers have preferred to invest in a LISA rather than a pension scheme.
There’s some evidence LISAs might have had a positive effect. According to specialist mortgage broker Tembo, first-time buyers with a LISA were able to buy their property around four years earlier on average than those who didn’t.[1]
· Junior ISA
These replaced the old Child Trust Funds and there were around 1.2 million subscribers to JISA accounts in 2021/22. The annual allowance is £9,000 and not part of your £20,000 personal allowance.
Available as stocks and shares, or cash, other family members can make contributions up to the allowance limit. The child can take control of their account from age 16, but cannot withdraw anything until they reach 18. At that point, it automatically converts into an adult ISA.
· Innovative Finance ISA
A relatively new addition, these use peer-to-peer lending platforms (which allow people to lend or borrow money from each other, not through a bank). These promise higher rates of interest but is only intended for more experienced investors because of the risks involved. There is limited protection if a borrower defaults and peer-to-peer platforms aren’t protected by the Financial Services Compensation Scheme if they collapse.
· A new UK ISA?
ISAs are constantly evolving. A decade ago, they expanded to include the Alternative Investment Market – smaller, faster-growing companies. The most recent potential development is the proposed UK ISA.
This could mean an added £5,000 allowance on top of the existing ISA limit and would be exclusively for stocks listed on the London stock exchange.
But don’t get too excited just yet! As a proposal from Jeremy Hunt’s Spring Budget, the UK ISA is still at theconsultation stage. With an election on the cards, it’s possible it may never see the light of day.
Even if it does, will a UK-only version be much of a draw? If you look at the performance of the FTSE 100 over the last quarter of a century, it’s had highs and lows but has generally stuttered along (it finished the last millennium at what was a record high of 6,930, but then took another 15 years to pass 7,000). We’re usually cautious about investors throwing all their eggs in one basket. Instead, we’d always suggest diversifying your assets is a much better strategy.
Want to know more? Talk to us about your ISA
In the past there’s sometimes been a misconception that ISAs were only for use in times of high interest rates, or when you’ve reached your personal savings allowance limit.
Now though, few could argue that. Whatever the environment and whichever tax bracket you fall into, they’re one of the first things on the checklist of any good financial planner. Even if the latest proposals don’t come to fruition, it’s important to keep an eye on what changes might be on the horizon.
So, whether you’re wanting to start with a lump sum or paying in instalments over the course of the year, speak to us about your next steps.
And remember, the early bird catches the worm!
[1] FT Adviser “First time buyers purchase four years earlier using Lisa”