Used up your ISA allowance?

Using your annual ISA allowance of £20,000 early can potentially be a sound strategy to maximise your returns. Time is after all money, and the sooner your allowance is invested in your ISA, the more time it has to work for you.

If you invested the full £20,000 of your 2024/25 ISA allowance on April 6th you would already have enjoyed two months of potential returns.

But what should you do if you are in the happy position of having money to invest after you have filled your ISA for the year?

The best answer to this will depend on your financial circumstances and goals – and on your tax position.

Using a savings account

Savings accounts are much more rewarding now than they were a year or so ago. If you can tie money up for a set term, they may be more rewarding still – with guaranteed returns of around 5% or more.

But remember tax. Once you have gone through your savings allowance, which lets you earn the first £1000 of interest tax free if you are a basic rate taxpayer, the taxman will take a 20% share through income tax. An additional-rate taxpayer will pay 45% and have no allowance. 

If you are employed or get a pension, HMRC will automatically update your tax code to collect tax on savings. However, if your income from savings or investments is over £10,000 then you need to register for self-assessment. 

Premium Bonds are issued by National Savings & Investments (NS&I), which is backed by the government. Each bond is £1 and you can invest up to £50,000 in these Bonds.

Bonds are entered into a monthly draw to win cash prizes of between £25 and £1 million, with an average payout rate of 4.4%. There is no tax to be paid on the prizes, but there are no guarantees of winning anything.

Paying down your mortgage 

At Continuum we usually advise against debt, and your mortgage is probably the largest debt you will ever have. But it is not like other debts, because even now, the rates you are being charged are relatively low.

You need to look closely at the figures. Will you be paying more in interest than you could be earning by investing? If you are still on a low fixed rate, you could be better off investing your cash until your low rate expires. But remember, you’ll probably pay tax on the interest you earn, which might make it more rewarding to pay down your mortgage.

Bonds and income

Bonds – essential loans to businesses or governments – can potentially be rewarding if you are looking for income rather than capital growth. Bonds with the highest returns, are high risk, but UK government bonds are generally considered safe. They are known as gilts and are the origin of the phrase ‘gilt edged investment’.  You will pay income tax on the premiums you receive, but gilts are not subject to capital gains tax.

Pensions

Pensions are an investment, but unlike other investments, the taxman is on your side. So, if you contribute £8,000 of your earned income into a pension, the pension firm will reclaim the basic 20% rate of tax, giving you £10,000 in your pension pot. If you are a 45% taxpayer, you can reclaim the remaining 25% tax via your tax return.  That £10,000 in your pension will cost you only £5,500. 

There’s no tax on interest, dividends or profits inside the pension itself although there will be some tax to pay when you draw from your pension.

All this means that a pension can be a great investment and an ideal way to use your spare cash, although you will not be able to get at it until you are 55 (this is set to change to 57 on 6 April 2028)

Investment Portfolio 

If you understand the markets, you could of course speak to an expert to build a portfolio of the assets you believe will suit your investment strategy.

You could also invest through a fund, where your cash is pooled with others, and either invested by an expert fund manager, or simply by tracking a particular market index.

Which approach seems appropriate for you may depend on your level of expertise, confidence and approach to risk – but all will mean income tax and capital gains charges, in addition to fees.

Getting some help

To see what types of investment are suitable for you after (or even before) you have made the most of your ISA allowance, it helps to get an expert view. At Continuum we can look at your resources, needs and approach to risk, and help you find the tax-efficient solutions that are appropriate for you.

There’s no need to wait until you have maxed out your ISA. Call us today.

Premium Bonds UK – are they worth buying? – MoneySavingExpert

When can I take money from my pension? | MoneyHelper

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment or retirement strategy, you should seek independent financial advice before embarking on any course of action.

A pension is a long-term investment; the fund value can go down as well as up and this can impact the level of pension benefits available. Pension Income could also be affected by interest rates at the time benefits are taken. Pension savings are at risk of being eroded by inflation.

The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.

The value and returns of an investment are not guaranteed, investors may lose some or all of their investment. Capital is at risk

Accessing pension benefits early is not suitable for everyone. You should seek advice to understand your options at retirement.

Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits.

Stocks and Shares ISAs do not include the same security of capital which is afforded with a deposit account.

The Financial Conduct Authority does not regulate deposit accounts or taxation advice.

Your home or property may be repossessed if you do not keep up payments on your mortgage.

You may have to pay an early repayment charge to your mortgage lender if you pay down your mortgage.

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