ISA’s are a great investment planning tool if you’re beginning to get serious about your financial situation and want to make sure your cash is working for you.

What Is An ISA Account?

Before understanding why the value of maxing out your ISA allowance annually, it’s important to understand what an ISA is.

ISA stands for Individual Savings Account and unlike other savings account, they offer tax-free interest payments. This makes ISA’s a very attractive savings option, especially for long-term savers who are planning their financial future.

There are four types of ISA account:

Cash ISA

Cash ISAs work in the same way as a regular savings account but the interest you make on them is tax-free. You can remove your money from a Cash ISA without any penalties, but you’ll also lose out on the long-term benefits.

Stocks and Shares ISA

Stocks and shares ISAs mean you are investing your money, rather than simply putting it in a savings account. This gives your money more opportunity to grow but remember, stocks and shares can also lose value.

Innovative Finance ISA

This is one of the less common types of ISA for most everyday investors and savers and allows you to make peer-to-peer lending investments without paying tax on the interest of the loan.

Lifetime ISA, often known as a LISA

A lifetime ISA has been designed to save for big milestones in your life, such as part of planning for your retirement or saving for a mortgage to buy your first home. They’re available to those between 18 and 40. Every year you gain a bonus of 25%, up to £1000, on your LISA investments.

You can also look at Junior ISAs if you want to start investing in your child’s future early.

What Is An ISA Allowance?

Your ISA allowance is how much you can put into your ISA every tax year, which runs from 6th April to 5th April the following year. The ISA allowance currently is £20,000.

If you don’t use your entire ISA allowance in a single tax year, you’re unable to carry the allowance over to the next year. This is why it’s important to make sure you invest as much as you can every tax year.

Interest earned on your ISA is not only tax-free but doesn’t count towards your personal savings allowance.

What Is A Personal Savings Allowance?

Your Personal Savings Allowance, also known as a PSA, is a figure set by the government and refers to the amount your savings account can earn in tax-free interest each tax year. There isn’t a fixed personal savings allowance, instead, it will depend on which tax bracket you fall into.

• 20% taxpayers can earn up to £1,000 tax-free interest
• 40% taxpayers can earn £500 tax-free interest
• 45% taxpayers don’t have a personal savings allowance at all

You can find out your income tax rate and personal allowance on the government website.

As you can see, if you plan to save large amounts or are in a higher tax bracket, there are plenty of reasons to invest your money in an ISA.

Why Max Out Your ISA Allowance?

So now you know all the benefits of an ISA account, why should you make sure to use your entire allowance every tax year?

Here are Rhodes Wealth Management‘s top three reasons why you should use your full ISA allowance before the tax year ends on the 5th April.

1) ISAs Offer Tax Efficiency 

Whether you’re using a Cash ISA or a lifetime ISA, one of the main benefits of an ISA is they’re a very tax-efficient investment. They provide what’s called a tax ‘wrapper’ because they legally protect the assets inside your ISA account from the following:

• Income tax on interest paid by cash, bonds and bond funds
• Dividend income tax on dividends paid by shares and equity funds.
• Capital gains tax paid on the growth in value of assets such as shares, bonds, and funds.

You don’t even have to declare your ISA assets on your self-assessment tax return!

2) ISAs Offer Flexibility

A Stocks & Shares ISA is a flexible way of investing your money. You can add money to it on a regular basis or whenever you have extra income. You can even withdraw it and use it for a holiday fund, or withdraw an amount when the investment has grown in value.

Keep in mind however, that the longer you are prepared to hold your investment, the more time it has to ride out any volatility while aiming to deliver a superior return to cash.

3) ISAS offer A Longer-Term Investment Strategy

Investing £20,000 over the full tax year or as a lump sum isn’t possible for everyone, but the more you invest at the beginning of the tax year, the more potential your money has of performing well. Although, it’s important to remember with any investment your capital can go up as well as down.

By planning ahead and contributing to your ISA on a monthly basis, you could end the tax year with a stronger investment portfolio.

Given the value of investments is subject to change, stocks and shares ISAs aren’t suitable for someone with a low-risk appetite or a short-term outlook. ISAs are generally suited for those who have a long term investment strategy and can invest their money for at least five years.

The value of an ISA with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested. An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA.

The favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation.