As the individual savings account (ISA) deadline looms on the horizon in early April, it could be a busy ISA season as inflation continues to bite and tax changes are incoming for the new tax year.
In the last full tax year, just over 8mln cash ISAs were subscribed, with just over 3.5mln stocks & shares ISA and almost 0.95mln junior ISAs.
Tim Bennet, head of education at Killik & Co, suggested now is the time for people to put money into an ISA, given taxes on savings are due to become tougher from 5 April, the day before the new tax year begins.
“Most people should at least consider using an ISA,” he said, “and those who can afford it should top up their account to the maximum saving limit.”
Up to £20,000 per adult can be added to ISAs each year currently, sheltering it from income and capital gains tax, with savers allowed to freely transfer accounts between providers.
Tax changes
Reductions in dividend allowance and the capital gains tax that is paid when you sell an asset, are set to kick in on April 5, making it harder to save outside of an ISA.
Tax-free dividend allowances are set to reduce from £2,000 to £1,000, announced in the Autumn statement last year, but income earned this way through an ISA will not be affected.
The allowance on capital gains tax will reduce from £12,300 to £6,000, meanwhile.
Within the wrapper of a stocks & shares ISA, savers can hold cash, shares, funds and bonds.
As income tax rates are usually higher than capital gains tax rates, Sarah Coles, head of personal finance at Hargreaves Lansdown says it’s worth prioritising "as much of your income-paying assets in ISAs as possible".
She adds: "If you hold income-paying shares or funds outside an ISA, you can use the 'bed and ISA' process to move them into the tax shelter."
Online broker and fund supermarket Interactive Investor noted that online 'bed & ISA' applications rose by 72% in the month after chancellor Jeremy Hunt's autumn statement, where the tax changes were flagged, with applications up 90% in December and 122% in January 2023.
Myron Jobson, senior personal finance analyst at ii, said: “A bitter cocktail of tax freezes and some reduced allowances mean that while headline tax rates haven’t risen, we’ll be paying more in tax over the coming years. But making the most of tax-efficient wrappers like ISAs and pensions could help protect your wealth from the taxman’s clutches.
“The impending swingeing cuts to the CGT and dividend tax threshold provides the impetus for investors to invest through a tax efficient wrapper if they haven’t already done so.”
As well as protects future gains and dividends from tax, he said shifting investments into an ISA also means you do not need to declare them on your self-assessment tax return.
ISA choices
The choice of which ISA to choose is vast, and as well as choosing between cash or stocks & shares, savers can also pick a ready-made stocks & shares ISA or a self-invested ISA.
Ready-made ISAs or ISAs from 'robo advisers' such as Nutmeg, Plum and Wealthify allow savers to pick their level of risk, sometimes from 1 to 10 or low, medium and high.
Self-invested options are provided by FTSE-listed Hargreaves Lansdown PLC (LSE:HL.), AJ Bell PLC (LSE:AJB), and Abrdn's Interactive Investor, as well as ISA newcomer CMC Markets PLC, which recently launched a stocks & shares ISA as part of CMC Invest platform.