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.

You have a £20,000 ISA allowance in the current 2019-20 tax year. You can’t carry it forward to next year, so it’s worth thinking about making the most of your allowance before the tax year finishes on 5 April 2020.

Here we look at some of the main reasons you might want to use it rather than lose it.

If you’ve already decided to use this year’s allowance, remember that you can pay the full amount into either an investment ISA, cash ISA or an innovative finance ISA. Alternatively you can split your allowance between any of these ISAs and the lifetime ISA,¹ providing you stay within the overall £20,000 limit.

With a lifetime ISA you can only pay in a maximum of £4,000 in each tax year.

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.

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

1. You can shelter returns from tax

There’s no UK income or capital gains tax (CGT) on any profits from buying and selling investments, within a tax-efficient investment ISA, subject to ISA conditions being met.

Freedom from CGT could be a valuable tax break for investors whose capital gains take them above the 2019-20 tax year’s annual CGT allowance of £12,000.

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 in the 2019-20 tax year.² If your dividend income is above this amount, investing in an ISA could give you the benefit of additional tax-free payments.

There’s also no UK income tax to pay on any interest you earn from cash, funds, gilts or bonds within an ISA, and if you save into an innovative finance ISA, there’s no income tax to pay on the interest you earn from peer-to-peer lending platforms.

If you save 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. Interest paid on cash ISAs does not count towards your personal savings allowance (PSA).

Whether an ISA is suitable for you depends on your circumstances. If your income and gains are not going to amount to more than the available tax-free allowances outside an ISA, then saving into an ISA wouldn’t benefit you in the short term. However, if they do, or you expect to reach this position over time and the rules don’t change, ISAs can protect your assets from tax over the long-term, enabling them to grow free of UK income tax, tax on dividends and CGT.

2. ISAs are more flexible than ever

You can withdraw and then replace cash, in the same tax year without it affecting your annual allowance, currently £20,000. This applies to flexible investment ISAs, cash ISAs and innovative finance ISAs, provided you have a cash holding within your account to draw upon. 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 the lifetime ISA or the Help to Buy ISA. If you make a withdrawal from a lifetime ISA in future tax years, after 2019/20, 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.

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

You don’t need thousands of pounds to open an ISA. Although the total amount that can be paid into ISAs is £20,000 in the 2019-20 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 from a cash ISA into an investment ISA, or into an innovative finance ISA, or vice versa. However, consider carefully if this is the right option given your circumstances.⁴

You can also transfer previous years’ subscriptions from these ISAs into a lifetime ISA up to the £4,000 annual limit, and whilst this will count towards your lifetime ISA subscription limit and will qualify for the government bonus, it will not count towards your overall ISA allowance.

Transferring your ISAs doesn’t affect their tax-efficient status, although bear in mind that tax rules can and do change over time, and their effect on you depends on your individual circumstances, which can also change. Before transferring your ISA, find out about any charges, exit penalties or benefits you may lose.

Find out more about the risks and drawbacks of transferring your investments. This includes things you should consider before you move to another provider.

For example, remember you’ll be ‘out of the market’ for a time if you’re transferring cash after selling your investments and perhaps planning on repurchasing them. You’ll miss out on any rise in value and on any income from these investments during that period.

If you’re moving from a cash to an investment ISA you should think carefully about whether you’re prepared to accept the higher risks that come with investing. The value of investments can fall as well as rise. You may get back less than you invest. If you’re unsure, seek financial advice.

Even if moving investments ISAs between different providers you need to be aware that there will be a period when you will be unable to sell your investments, and check whether all your investments can be held. Speak to your provider first and ensure you understand the process, timeframe, and any charges involved. Check that any new provider accepts transfers, as not all do. It should manage the transfer process, including contacting your current provider and moving the money for you.

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.

Tax rules can change and whether ISAs benefit you will depend on your circumstances.

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.