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ISAs and the End of the Tax Year: Optimising the Annual UK Allowance

Contributed by Sussex SEO
March 27, 2019

Several financial thoughts and plans develop at the beginning of the year for UK residents, mostly geared toward improving one's financial picture or boosting savings throughout the upcoming 12 months. However, many overlook the end of the tax season as one period of time to make some serious financial moves. The deadline to make some important additions to your overall financial standing happens on 5 April, when one tax year ends and the next begins. The most pressing of financial strategies, specifically designed to help save on taxes, is the ISA allowance. Each year, UK residents are allowed to save up to GBP20,000 across certain individual savings accounts, also known as ISAs. These accounts were created to boost savings across the UK population, offering incentives for taxpayers to put away money for the short- or long-term. There are various types of ISAs taxpayers can contribute to before the 5 April deadline, but first, it is helpful to know why ISAs are a powerful savings vehicle.

How Do ISAs Work?

Any taxpayer over the age of 18 can establish and contribute to an individual savings account in the UK. An ISA is simply an account that offers special tax benefits on the interest or investment gains earned on the account. Instead of paying taxes on those gains, year in and year out, funds in an ISA grow tax-free. This can mean more money in your pocket and more efficient way of savings or investing for the future. ISAs come in a few different forms, but no matter the type selected, savings is capped at GBP20,000 per adult, per tax year. If the full contribution amount is not made by the tax year-end, the remaining allowance cannot be rolled over into the next tax year. Because of this restriction, taxpayers who have enough money set aside to top up their ISA may want to do so in the coming weeks so the allowance is not then lost forever.

Cash vs. Stock and Shares

Many taxpayers may not have the means to top up their ISA savings to the maximum this tax year. However, making even a small contribution can be beneficial because of the tax savings on earnings within the account. Before making a contribution, though, individuals should recognise that there are two broad types of individual savings accounts: cash and stock and shares ISAs. According to a finance specialist with Money Pug, a website used to help taxpayers uncover the best ISA deals, both cash and stock and shares ISA options have the same tax benefits, but the earnings are derived in different ways.

Cash ISAs offer individuals cash-like accounts, or savings account, typically made available through banks or building trusts. With a cash ISA, don't expect to break the bank with your interest earnings. Instead, you'll receive a steady rate of return that hovers around the national average. This interest is tax-free, even if it isn't much to write home about.

Stock and shares ISAs differ in how they generate a return. Taxpayers with stock and shares ISAs invest their savings in investment funds, unit trusts, shares of companies, or corporate or government bonds. Each of these investments may provide a much higher return than a cash account, but they can lose money, too.

Before making a decision on which type of ISA to establish and contribute to, know that you can have both. So long as you do not exceed the GBP20,000 allowance for the tax year, you can have a cash and a stock and shares ISA to help balance out the risk you take on and the return you earn.

Taxpayer Considerations

Before using available cash to contribute to or top up an ISA for the tax year, taxpayers should consider their ability to do so based on their own financial circumstances. If there are other pressing expenses, an ISA may not be the best use of funds. However, if there is extra that can be used to generate tax savings for the future, and ISA may be a smart choice. Most ISA providers allow some degree of flexibility in how money can be taken out and put back in throughout the year. Be sure to compare rates, investment options, and withdrawal options before making a choice on your ISA for the 2018/19 tax year.


Tags: United Kingdom | Banks/Financial



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