Why it pays to use your ISA allowance early

The 2024/25 tax year is here, and its already time to think about how you will use your £20,000 ISA allowance.

You could argue that there is no rush. After all, the allowance is renewed annually, and you have until April 5th, 2025, to take advantage of the concession from the taxman.  But waiting until the end of the tax year before you use your ISA allowance may not be a good idea.

We look at why not – and at what are good ideas, when it comes to ISAs – and how you can start making the most of your ISA entitlement in in 2024/25.

A reminder – what is an ISA?

An ISA, or Individual savings account can be described as a tax wrapper that protects your money from the taxman. You can put in cash as savings or use it to invest in stocks and shares. As long as it is inside your ISA, you will have no tax to pay on the interest or profits it makes for you, and no income tax dividend tax or capital gains tax to pay when you come to cash it in.

The tax concession is so valuable, the government has set an annual limit (currently £20,000) in your annual ISA is contributions. This is your ISA allowance, and it resets with every new tax year, on April 6. But you can’t backdate your allowance if you have not made the most of previous years.  With your ISA allowance, you must use it or lose it.

Why you need to start thinking about your ISA plans now

With almost a year to go before the deadline for 2024/25 contributions, many people will be putting their ISA decisions on the back burner while they deal with more urgent matters.

This may be a mistake, for the old familiar reason that time is money, and particularly when it comes to savings and investments.

The simple fact is if you invest now, at the beginning of the tax year you should enjoy better returns. That’s because your money will have a whole year longer to grow tax-free. This can add up to a great deal if you invest your whole £20,000 allowance. 

ISAs always get a lot of attention at the end of each tax year, when advisers urge clients not to let the opportunity for tax-efficient savings and investment go to waste – but the savvy investor knows it’s the early bird that catches the worm.

So how should you use your ISA allowance?

There are several types of ISA to consider when you are planning how to use your ISA allowance.

Cash ISAs are the simple answer for savings. You can choose open ended or fixed-term ISAs with guaranteed returns. They are secure – capital up to £85,000 is protected by the government’s Financial Services Compensation Scheme. They can form part of an ISA strategy. Once cash is inside an ISA the taxman cannot touch it, and you can transfer it if a more rewarding opportunity comes along. 

If you have a short time horizon or prioritise protecting your money, a cash ISA might best suit your goals.

Stocks and Shares ISA. Over time, returns from cash savings are likely to fall behind the stock market.  

Invest through a Stocks and Shares ISA, and you are protected from both capital gains and dividend tax. There are many to choose from, some aimed at capital growth and at income.

If you can invest for 5 years or more, a Stocks and Shares ISA may have excellent prospects for riding out the ups and downs of the stock market to deliver real growth.

Lifetime ISA (or LISA). The LISA can help you save towards a deposit for your first home or help fund retirement. It can make up to £4000 of your annual personal £20,000 ISA allowance.  Savers under the age of 40 can open a LISA and the Government will chip in £1 for every £4 they save. Any withdrawals before the age of 60 will incur a 25% government withdrawal charge (except if you are using your LISA money to pay for a deposit on your first home).

However it is worth noting, when investors turn 50, they will not be able to pay into their Lifetime ISA and continue to earn the 25% bonus. Although your account will stay open and your savings with still earn interest or investment returns.

Junior ISA (or JISA). JISAs can be opened for anyone aged under 18 living in the UK. Parents can contribute up to £9,000 each tax year separate from their personal ISA allowance.

Innovative Finance ISAs (Or IFISAs). IFISAs let you use your ISA allowance for peer-to-peer lending. 

The new ‘British ISA’. The British ISA was announced in the budget, and when launched could give you an extra £5,000 a year on top of your normal annual allowance. This is still at consultation stage and won’t be available until this has been completed.

Get some expert help

You can decide whether to put your allowance in one particular ISA, or split it across a several, according to your wealth creation strategy.

There are choices to be made, and with every provider fielding a different offering and set of charges, expert help could be essential to find the ISA – or ISAs – that are suitable for you.  At Continuum we will be happy to provide it. Simply give us a call.

But don’t wait. The sooner you can start making the most of your 2024/25 ISA allowance working for you, the better off you might be.

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

The Financial Conduct Authority does not regulate taxation advice.

By incurring a Lifetime ISA Government withdrawal charge you may get back less than you paid in.

By saving in a Lifetime ISA instead of qualifying pension scheme you could lose contributions by your employer, if any.

Saving in a Lifetime ISA may affect your entitlement to current and future means tested benefits. 

Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. We recommend that the investor seeks professional advice on personal taxation matters.

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

When investing, your capital is at risk.

Book a Meeting

If you want to get a free consultation without any obligations, fill in the form below and we'll get in touch with you.

    Sign-up to our free weekly online publication

    How can we help you?
    Scan the code