A Journey through Individual Savings Account (ISA) Season

Ernestina Saarrah-Mensah

Ernestina Saarrah-Mensah
Scottish Widows

Hello there! I’m Ernestina, and welcome to the next blog in our series: “Helping you to be money well.”

The ISA season is a key period in the savings calendar. If you are unfamiliar with the term, this is the period between March and April when savers are encouraged to use their tax-free Individual Savings Account (ISA) allowance before the tax year ends and a new tax year gets underway. 

For the 2023/24 and 2024/25 tax years, you can save up to £20,000 into an ISA, and this ISA allowance resets at the beginning of every tax year starting from the 6th April. The total limit of £20,000 applies irrespective of how many different accounts are held. 

As we approach the end of the tax year, taking advantage of your ISA allowance may be a good strategic move. I asked Jonathan Sandell, Group Head of Proposition and Marketing for Embark, to explain some key things to consider when it comes to saving through an ISA. 

Jonathan Sandell, Group Head of Proposition and Marketing for Embark

Jonathan Sandell is the Group Head of Proposition and Marketing for Embark, which is the provider for Lloyds Banking Group’s Ready-Made Investments – a stocks and shares ISA that lets customers pick a suitable investment fund simply and easily and manage their investment through their mobile banking app.  He’s spent 30 years helping customers save and invest their money so that they can have the confidence to enjoy a secure financial future. 

Jonathan, what makes Cash ISAs different from other saving accounts? 

The unique feature of ISAs is that they are tax-efficient way to save. There is no tax due on the interest gained from your savings. In a standard savings account, you have to pay tax on any interest that goes over your personal savings allowance. Your savings allowance depends on the level of income tax you pay:  

  • Basic rate taxpayer - £1000 
  • Higher rate taxpayer - £500 
  • Additional rate taxpayer - £0 

For interest gained above the allowance applicable to you, you will be subject to tax at your standard rate of income tax. For ISAs, there is no tax pay and this can be significant saving for those with large cash balances.   

What is the difference between a cash ISAs and a stocks and shares ISAs?

Cash ISAs offer a safe and tax efficient way of saving for the short term, while stocks and shares ISAs are really a vehicle for investing over the longer-term, typically for five years and longer. Stocks and shares ISAs involve greater risk than a cash savings account, but they also have the potential for greater reward in the shape of higher returns.  

There is another important consideration and that’s inflation. Price rises for goods and services can eat away at the purchasing power of your cash savings. A basket of supermarket goods bought with £200 now is likely to have significantly less in it in 10 years’ time and that is the real hidden impact of inflation.  

How can you offset the impact of inflation on your savings?

Investing in the shares of companies that set and benefit from higher prices via a stocks and shares ISA provides the potential for higher returns that offset the impact of inflation. However, it is important to say that investing in the stock market also comes with a risk to your capital; your investment can go down as well as up. That said, history suggests that shares can be a rewarding investment over longer time periods.  

What are the tax advantages of a stocks and shares ISA?

A key tax advantage is that you do not pay tax on any of the capital gains made on your stocks and shares ISA investment.

For investments made outside of an ISA, gains would be calculated at the point of withdrawal and for the 2023/24 tax year, any gains made above £6,000 would be subject to tax at your standard rate of income tax. This capital gains tax allowance is reducing to £3,000 for the 2024/25 tax year, meaning there is a higher chance of tax being due on any investment gains made. This makes ISAs an even more attractive savings option.  

Another tax advantage of a stocks and shares ISA is that dividends earned within an ISA are tax-free. If you were investing outside of an ISA and you received dividends of more than £1,000 (the 2023/24 dividend allowance) you would be subject to income tax. How much tax you pay on dividends above the dividend allowance depends on your income tax band:  

  • Basic rate taxpayer – 8.75% 
  • Higher rate taxpayer – 33.75% 
  • Additional rate taxpayer – 39.35% 

It is also worth noting that for the 2024/25 tax year, the dividend allowance will also reduce to £500. Again, this makes ISAs an even more attractive savings option.  

What tips would you give to someone starting on their ISA investment journey? 

Don’t delay, just get started with whatever you can afford to set aside on a monthly basis. Don’t be put off if you haven’t got £20,000 or a big lump sum to invest. The key thing with investing is to start early so that your investment has the chance to grow and compound over time.  

You can set up a regular payment every month into an ISA – this allows you to benefit from ‘pound-cost averaging’, which dampens the impact of fluctuations in the stock market. It means that if the stock market goes down from one month to the next, your next monthly payment is able to buy shares more cheaply than your last. Over time, your payments can grow and earn a positive return which enlarges your total capital. The opportunity to benefit from further returns on your enlarged capital means that you can benefit from compound growth over the long term.  

What are the different types of ISA accounts? 

Cash ISAs allow you to save without paying any tax on the interest you earn. They tend to be a low-risk savings option as your savings are held in cash. Cash ISAs are ideal for those who need a secure and easily accessible option for their savings. Different cash ISAs however will have different access rules which might impact the interest people will receive. For example, fixed rate ISAs may pay a higher rate of interest, but they may require your money to be held in the account for a certain period of time before it can be withdrawn.  

Stocks and Shares ISAs allow you to invest in a variety of investments, such as shares, investment trusts for example, but without the potential tax implications of doing so. As described above, there is no tax due on capital gains made or dividends received.

There are several investment platforms that offer Stocks and Shares ISAs, and you should always be sure to know the cost a provider charges for managing the stocks and shares in the ISA.  This type of ISA usually comes with a higher level of risk than cash ISAs as the value of your savings will fluctuate in line with the assets they’re invested in. Therefore, it’s important to keep in mind that you may get back less than you’ve paid in.   

Lifetime ISAs (LISA) are designed for those saving towards their first home or retirement and can be opened by individuals aged 18-40. You can save up to £4,000 per year into a LISA, which counts towards your overall £20,000 ISA allowance. The government will add a 25% bonus onto the amount you have saved, meaning the maximum amount you will receive from the government is £1,000 per year.

The savings and bonus can be withdrawn tax-free if used to buy a first home or after reaching the age of 60. You may also be able to withdraw your savings for other reasons, for example following a terminal illness diagnosis, and still receive the government bonus. However, if you withdraw for any other reasons, you incur a 25% penalty, which negates the government bonus.  

Junior ISAs (JISA) provide a tax-efficient way for parents and legal guardians to save on their children’s behalf. JISAs can be opened by a parent or legal guardian on behalf of a child under the age of 18 and the parent/guardian can contribute up to £9,000 per year into the JISA.

The same tax advantages apply as with other ISAs however, unlike other ISAs, this £9,000 allowance doesn’t count towards an individual’s overall £20,000 ISA allowance. The child gains control of the account at 16 but can’t withdraw funds until they turn 18, at which point it converts to a regular ISA.  

What are your top tips for someone thinking about opening an ISA account?  

  1. Just get started with whatever you can afford. There are always lots of reasons to put things off for a week, a month or even a year but with investing the most important step is the first. Getting started early gives your money the maximum amount of time to grow.  
  2. Try to make the most of you tax-free allowance every year. Once it’s gone, it’s gone forever.  There is still time to maximise your 2023/24 allowance up until the 5th April.  
  3. Start to plan how you can maximise your ISA allowance for the next tax year starting on the 6th April 2024.  
  4. You don’t need a big lump sum to invest. You can invest £50 a month, for example. Regular investing can dampen the impact of market fluctuations and lower the average amount you pay for your investments. 
  5. The value of your investments can go up and down, and there’s always a risk that you could get back less than the amount you originally invested, so have a think about the level of risk you are willing to accept. 
  6. If you’d like some help in making a decision and finding out about your risk appetite, you can speak to a financial adviser, who will normally charge for the advice they provide. You can find an adviser at unbiased.co.uk


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