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Four reasons to consider using your ISA allowance

If you don’t use your 2018-19 ISA allowance by 5 April 2019, it’ll be gone for good. Here are four reasons why you should to consider using, rather than losing, your allowance.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice. Tax rules can change in future. 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 have a £20,000 ISA allowance in the current 2018-19 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 2019.

You can pay the full amount into either an investment ISA, cash ISA or an innovative finance ISA, or alternatively you can split your allowance between one or all 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 change at any time in the future. Any favourable treatment currently available could later be altered or removed altogether. In any case, how valuable any tax breaks are to you depends on your individual circumstances, which can also alter over time.

Find out more about our Investment ISA

1. Shelter returns from tax

There’s no tax on any profits from buying and selling investments within a tax-efficient investment ISA.

Freedom from capital gains tax (CGT) could be a valuable tax break for investors whose capital gains for a tax year take them above this year’s annual CGT allowance of £11,700.

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, down from £5,000 in the previous 2017-18 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 tax to pay on any interest you earn from cash, fund, gilts or bonds within an ISA.

A personal savings allowance (PSA), was introduced in April 2016.3 This 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).

Despite these recently introduced allowances that reduce the tax on returns from savings and investing, an ISA might remain worthwhile for savers with big sums who will have used up the PSA dividend allowance or CGT allowance, as they can earn further tax-free interest, dividends and gains. It’s also worth bearing in mind that if the Bank of England base rate starts to rise, savers could find they surpass these tax-free allowances.

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.

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. However, if they do, or you expect to reach this position over time for example when you retire, then you could consider investing in an ISA though you should bear in mind that these rules can change in future.

2. Flexible ISAs

Cash you withdraw from a flexible ISA can be replaced in the same ISA during the same tax year without counting towards your annual ISA allowance.

You can make withdrawals from an investment ISA, a cash ISA or an Innovative Finance ISA without it affecting your allowance, provided you have a cash holding within your account to draw upon. Remember that not all ISA providers may offer this flexibility, so don’t withdraw any money from your ISA without checking if your provider does.

ISAs are also flexible in so far as they enable you to hold a wide range of investments.4 For example, if you invest in an investment ISA, options include shares, funds, investment trusts, open-ended investment companies (OEICs) and exchange traded funds (ETFs).

The ISA flexibility rules do not apply to the lifetime ISA. If you make a withdrawal from a lifetime ISA in future tax years, after 2018-19, you'll face a 25% penalty levied against your withdrawal amount, except where you are aged over 60 or where you use the withdrawal to buy your first property and are under 40 years old.

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

You don’t need thousands of pounds to open an ISA. You can take advantage of ISA benefits with savings of as little as £1 if you’re opening a cash account, while you can make regular payments into an investment ISA starting from £50 a month. The total amount that can be paid into ISAs is £20,000 in the 2018-19 tax year.

If you paid in the full allowance every year, 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 if you want. However, consider carefully if this is the right option given your circumstances.5

You can also transfer 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.

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. If you’re unsure, seek professional financial advice.

Barclays Investment ISA

Our Investment ISA puts you in the driver’s seat. Choose from over 2,000 funds, shares and other investment opportunities to build a diversified portfolio for your needs.

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