Four reasons to consider using your ISA allowance

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.

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 opening line to the ‘Only Fool’s and Horses’ theme tune, the sheltering of returns from tax within ISA allows is a key consideration. 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 2020-21 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. Find out more about what PSA means to you.

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 protect your assets from tax over the long-term.

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 2020-21 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 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 rules.⁵ If you’re transferring money you’ve paid 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 can 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.

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

Remember too that if you’re transferring contributions made in the current tax year, they must be transferred in full. If you want to transfer contributions made in previous tax years, you can choose what proportion of these you want to transfer. Find out more about the risks and drawbacks of transferring your investments.

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.