The April 5th tax deadline for ISA allowances has passed, but it’s still worth looking at all the ways you can make the most of your tax efficiency in the new financial year.
The £20,000 ISA allowance remains one of the most effective ways for UK residents to save money without paying tax on the profits made.
Unlike pensions, which involve locking your money away until retirement, individual savings accounts are great for building your wealth while having the ability to make withdrawals at short notice or when the term ends on a fixed-rate Cash ISA.
However, your £20,000 allowance resets each tax year, and its ‘use it or lose it’ status means it doesn’t roll over yearly. With this in mind, it’s important to make the most of your allowances with each tax year in mind.
There are many ways that you can use your ISA’s tax-free allowance to your advantage once the April 5th deadline has passed, and these include the following:
1. Maximising Your Allowance
Most importantly, you should always look to make the most of your £20,000 tax-free allowance for your individual savings account.
Whether you have a Cash ISA or Stocks and Shares ISA, your allowance will reset on April 6th each year, making it imperative that you work towards that £20,000 margin every 12 months.
Of course, this is a significant amount of money to save each year, so many ISA subscribers won’t reach their allowance limits. But if you’re planning to invest more next year or are expecting a windfall in the future, you should definitely consider creating a savings strategy to maximise your ISA’s potential.
2. Audit Old ISAs
Things can change very quickly when it comes to the economic landscape. Factors such as interest rates and inflation can make your high-performing ISAs of yesteryear become loss leaders with short notice.
With this in mind, it’s always worth going through your existing ISAs to check whether they’re still as profitable as before or whether their rates have become too weak to deliver profit in real terms.
To do this, compare the rates offered by your Cash ISAs to inflation and the Bank of England’s base rate. If your individual savings account is coming up short against one or both of these benchmarks, you could be losing money.
3. Consider Transferring ISAs
The new tax year can be a great time for a spring clean of your ISAs, and transferring your old Cash or Stocks and Shares ISAs to a new provider could be a great way to manage your accounts and maximise your tax efficiency.
Transferring ISAs from previous tax years doesn’t impact your annual allowance, and switching to providers that offer flexible accounts, like Wealthify, means that you can get better visibility on your tax-free allowances for better money management.
4. Double Your Allowance with Your Spouse
If you’re married, you can double your ISA allowance each tax year through a process called ‘interspousal transfers.’
This approach can expand your annual allowance to £40,000 if your spouse isn’t planning on using their ISA limits, helping to improve your saving strategy once your tax-free allowance resets.
However, it’s always worth having a clear agreement with your partner when using this strategy because any money that’s transferred to their ISA legally belongs to them.
5. Build a Junior ISA for Your Kids
Looking for ways to save beyond your ISA allowance in the new tax year? Consider opening a Junior ISA (JISA) for your children or adding to it so they can reach their annual allowance.
Junior ISAs have an annual tax-free allowance of £9,000 per year for each child. They can’t access the funds until they’re 18, but can control their accounts from the age of 16 with certain providers.
The great thing about JISAs is that anyone can contribute, meaning that if you’re a grandparent with spare cash each year, you can add to your grandchildren’s savings accounts.
6. Consider Saving Excess Funds into a Pension
Because Pensions offer tax relief of up to £60,000 per year, or 100% of your income, depending on what’s lower, it makes saving for your retirement a great approach for making the most of your tax efficiency should you plan to use all of your £20,000 ISA allowance over the year ahead.
7. Add Dividends to Your Strategy
Dividend allowances have fallen to £500 in recent years, but this doesn’t apply to Stocks and Shares ISAs, where all profit earned from dividends is entirely tax-free.
With this in mind, you should look to overcome stricter annual dividend allowances by switching your positions into your Stocks and Shares ISA for the tax year ahead. This will help you to continue earning payouts without having to endure the taxman eating into your earnings.
8. Plan the Year Ahead
Time waits for no savers, and you should have an eye on the year ahead already. Knowing what to do with your allowance today can heavily involve plans for next year.
Look at your saving patterns over the past 12 months, and explore areas that you could make more efficient in reaching your £20,000 allowance in the future. It also pays to assess your different accounts as you begin using your fresh allowance to work out a month-by-month plan of where and when to invest.
Working Towards Tax-Efficiency
Getting the most out of your ISA’s tax-free allowances after a new tax year begins on April 6th can make all the difference in your profit margins.
Although it can sometimes feel like spinning plates when you have multiple savings accounts active at the same time, keeping your allowances in mind helps you to strategise your wealth management for the years ahead.
By taking the time to consider your options at the beginning of each tax year, you can create a sustainable savings strategy for the future, giving you peace of mind that your money is in the right place and is kept safe from the clutches of the taxman.
