Don’t delay
The end of the tax year on 5 April is rapidly approaching, and, with it, the deadline to use this year’s £20,000 Isa allowance.
An Isa enables you to save, or invest, money without having to pay tax on what you make. You do not pay tax on interest on the cash in an Isa, or on income, or capital gains from investments held in one.
These advantages could be particularly valuable this year for cash and stocks and shares Isas.
Basic-rate taxpayers can earn up to £1,000 interest tax free outside an Isa, while higher-rate taxpayers can earn £500 under the personal savings allowance. With many savings rates now above 5%, the interest on £25,000 will often breach the £1,000 allowance.
Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown, says: “Savers don’t need a huge pile of cash before needing to worry about a tax bill. With interest rate cuts on the horizon, you might think this is a short-term worry. However, even if rates fall in the short term, money in a cash Isa is protected from income tax for ever – regardless of what happens to rates, savings allowances and tax.”
Meanwhile, the cuts to the dividend tax and capital gains tax allowances in the current tax year, and the next one, make stocks and shares Isas even more appealing. “By protecting your money in a stocks and shares Isa, you don’t have to worry about either tax,” says Coles.
Know the rules
First, check if you have already used some of this year’s allowance. If you manage your Isa through an online account, your provider will typically display your remaining allowance when you log in.
Alice Haine, personal finance analyst at investment platform Bestinvest, says: “If you haven’t paid into your Isa in the previous tax year, you may need to reactivate it before you can contribute. This is a relatively straightforward process that can often be done on the phone.”
Some Isas are flexible, so you can take money out, and then put it back in during the same tax year without reducing your current year’s allowance. Your provider can confirm if your Isa is flexible.
The two most popular Isa types are cash, and stocks and shares. However, you can’t pay into more than one of the same type this tax year.
Coles says: “So if, for example, you pay into a stocks and shares Isa at the start of the tax year, you can’t take out another one with a second provider later in the tax year – unless you’ve arranged a transfer.”
From April this year, the rules are changing. You can open and pay into different Isas of the same type in a single tax year, such as two cash Isas.
Cash, or stocks and shares?
Your savings goals should determine which you should choose. If you are saving for a goal at least five years away, ideally longer, investing is likely your best option. But if you are saving for something like a new car in a couple of years or so, stick to cash.
When it comes to returns, stocks and shares win over the long term. According to investment firm AJ Bell, £1,000 invested in a global tracker fund 20 years ago would be worth £7,145 today. The average cash Isa would have returned £1,269 over the same period.
Cash Isa rates are now relatively high. At the time of writing, according to financial data site Moneyfacts.co.uk, there were a number of easy-access cash Isa providers paying more than 5%, including Moneybox (5.16%), Plum (5.15%), Virgin Money (5.06%) and Charter Savings Bank (5.03%).
Meanwhile, Kent Reliance building society was offering 5.07% on its one-year fixed-rate cash Isa.
However, Laura Suter, head of personal finance at AJ Bell, says that while cash is enjoying a heyday at the moment as interest rates have risen, “over the long term, cash rates tend to be low, with cash Isas returning 1.2% a year over the past 13 years, according to the Bank of England”.
For stocks and shares, watch out for fees. Investment company Vanguard offers a cheap option with its ready-made LifeStrategy funds holding global investments. It boasts on its website about its “low fees and clear costs” and is a Which? “recommended provider” for investment platforms.
Last-minute deals
Now may be a good time to move existing cash Isas to higher-paying providers, as well as use this year’s allowance. Providers often launch new deals to attract last-minute Isa contributions, and may offer cashback for transferring to their platform.
For example, Hargreaves Lansdown is offering £25 cashback to new cash Isa clients who pay £10,000 or more into the savings products within its platform.
But with investment Isas, consider ongoing costs over temporary offers.
Suter says: “When you’re picking your investment Isa provider, you want to make sure you’re getting the right one for you. There is a huge range of options, with different levels of support, different investment options and varying charges, so you should do your research to work out which is best for you.”
She adds that some questions to ask yourself include “do you need a full range of investment options, or will a pared-down list work? How much will it cost for your portfolio size compared with rivals, and would you prefer one that’s app-based or website-based (or both)?”
Invest at your own pace
If you are reluctant to dive into the stock market, that’s not a reason to delay. You can hold cash within a stocks and shares Isa until you are ready.
Haine says: “Provided the cash is loaded into the Isa before the tax year end, it is considered part of the current tax year’s allowance. The saver can then make investment decisions on their timeline – even if that happens in the next tax year.”
She adds: “If someone is opening an Isa in the final few minutes of the tax year, the last thing they need is to get into a panic trying to decide on an investment strategy that aligns with their attitude to risk and long-term financial goals.”
Some investment platforms provide interest payments on cash balances, so your money will continue to earn interest. Bestinvest pays 4.45% on cash balances in its stocks and shares Isa.
Beware delays
Most people open, or top up, their Isa online. The process is straightforward, requiring only a debit card or bank details, and your national insurance number.
However, if you leave it until the last minute, and the transaction isn’t completed by midnight on 5 April, you will have missed the deadline for this tax year.
If you fail identity checks, the provider may request documents, such as utility bills, or proof of address by post. Providers have varying deadlines for postal, online and telephone applications.
Typically, providers extend their helpline hours, often remaining open until midnight on 5 April to accommodate last-minute requests.
