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Four reasons to consider using your ISA allowance

6 minute read

You have a £20,000 ISA allowance to use by 5 April 2022. Here are four reasons why you should consider using, rather than losing, your allowance.

Who's it for? All investors

The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

What you’ll learn:

  • How you can withdraw money from your ISA without it affecting your annual allowance.
  • Why you don't need a large lump sum to invest in an ISA.
  • How to transfer an ISA.

Learn in 10 – Why choose an Investment ISA?

Short on time? Watch this quick 10 second video on the benefits of ISAs.

You can benefit from sheltering your investment returns from income tax, tax on dividends and Capital Gains Tax (CGT), and enjoy access to a wide range of investments. 

#LearnIn10 

@BarclaysInvest 

Let's go forward

Here we look at four main reasons why you should consider using, rather than losing, your allowance. Bear in mind that tax rules can and do change and their impact on you will depend on your individual circumstances, which can also change. Also, remember that investments in ISAs can fall in value, just like any others. You may get back less than you invest.

Find out more about our Investment (Stocks and Shares) ISA1

1. You can shelter returns from tax

No income tax or CGT. While this might not be the exact opening line to the ‘Only Fool’s and Horses’ theme song, the words could easily be applied to the potential appeal of an ISA to help you shelter returns from tax, something Del Boy would surely approve of. This is because within a tax-efficient investment ISA, subject to conditions being met, any profits from the buying and selling of investments incur no UK income tax or capital gains tax (CGT).

This freedom from CGT could provide a much-needed tax break for investors whose capital gains take them above the 2021-22 tax year’s annual CGT allowance of £12,300.

You also don’t pay tax on dividends from shares held in an ISA. Outside an ISA, all taxpayers have an annual tax-free dividend allowance of £2,000 but anything above that is liable to tax. Basic-rate taxpayers must pay 7.5% on any dividends above the £2,000 allowance. Higher-rate taxpayers pay 32.5% and additional-rate taxpayers pay 38.1%.2

So, if you receive more than £2,000 in dividend income, or may do in the future, investing in an ISA means you won’t be taxed on it.

If you have any savings income outside an ISA, there is a personal savings allowance (PSA)3 which enables basic-rate taxpayers to earn up to £1,000 interest a year tax-free, or £500 for higher-rate taxpayers. Additional rate taxpayers aren’t entitled to this allowance. You’ll pay income tax on any interest you receive above these amounts, unless your money is in an ISA. This savings income covers several different kinds of investment income.

You may decide that you won’t benefit from an ISA because the other tax allowances available for cash savings and investments are more than enough based on your circumstances. However, if you plan to continue building the amount of money you have in savings and investments, ISAs can help protect your assets from tax over the long-term.

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Investment ISA

An easy way to start investing

We offer two ways to invest using an Investment ISA (also known as a stocks and shares ISA). Choose your own investments with Smart Investor, or let us make the decisions for you with Plan & Invest. Either way, invest up to £20,000 per year and any returns you make are tax-free4.

Start investing to make the most of those special times to come by using your new 2021-22 ISA allowance in an Investment ISA today. The sooner you begin, the sooner you could grow your money, tax efficiently.

2. ISAs are more flexible than ever

ISAs have become much more flexible in recent years. You can withdraw and then replace cash, in the same tax year without it affecting your annual allowance, currently £20,000. Remember that not all ISA providers offer this flexibility, or may offer it only on some of their products, so check with your provider before you withdraw any money.

The ISA flexibility rules do not apply to Lifetime ISAs or the Help to Buy ISAs. If you make a withdrawal from a Lifetime ISA in future tax years, you'll face a 25% charge levied against your withdrawal amount, except where you are aged over 60 or where you use the withdrawal to buy your first property. (Please note, Barclays doesn’t offer Lifetime ISAs and Help to Buy ISAs were withdrawn from the market in 2019. If you’d like more information on either product by visiting www.gov.uk/lifetime-isa)

3. You don’t need a large sum to invest

Worried you can’t afford to use an ISA? The reality is that you don’t need thousands of pounds to open one. Although the total amount that can be paid into ISAs is £20,000 in the 2021-22 tax year, you don’t need to have this much available to take advantage of ISA benefits.

If you did pay in the full allowance every year, however, you could potentially grow a savings pot worth hundreds of thousands of pounds over time – there’s no limit to how much the value of your investment ISA can grow. However, you need to appreciate that the value of your investments can fall as well as rise and you may get back less than you initially invested.

4. You can transfer your ISA

You can transfer ISAs – maybe you want to switch provider, have found a better cash ISA rate or want to move from cash into investments or vice versa. However, before you do, consider carefully if it’s the right option given your circumstances and make sure you understand the rules5.

If you’re transferring money you’ve saved or invested into your ISA in the current tax year, you must transfer the full amount.If you want to transfer contributions made in previous tax years, you don’t have to move it all. For example, you may have money in a cash ISA and want to invest some, but not all of it. Find out more about the risks and drawbacks of transferring your investments.

And before transferring your ISA, find out about any charges, exit penalties or benefits you may lose.

Please bear in mind that this article is for general information purposes only and Barclays Smart Investor does not provide personal investment advice. If you’re unsure, seek professional financial advice.

Recent podcast

Who wants to be an ISA millionaire?

In this episode of Money Plan, we look at the growing number of ISA millionaires and what you can do to get yourself on the road by using as much of your ISA allowance as possible each year and getting your money working as hard as possible.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

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