4 Isa tips to maximise your tax-free savings

Isas allow you to save up to £20,000 a year without paying a penny to HMRC and are a must-have for anyone looking to shield money from the impact of tax changes announced in last week's Autumn Budget. 

Among the major measures the Chancellor unveiled in her fiscal plan on 30 October was an immediate hike of capital gains tax (CGT) rates. And the existing freeze on income tax thresholds won't be lifted until 2028. This means that more people are likely to be pulled into a higher tax bracket as wages rise over the next few years, something often referred to as 'stealth tax'. 

Isa account holders who are serious about reducing their tax burden should take full advantage of all the benefits offered by the product, not just the generous annual tax-free allowance. Here are our top tips to help savers and investors make the most of their Isa.

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1. Choose the right Isa for your needs

Choosing an Isa that suits your financial goals can help ensure you are making the most of your allowance. There are the four types available to adults:

• Cash Isas: a great option for short-term savers who may need access to their money over the next five years. They work in a similar way to a traditional savings account, with instant access, regular saver and fixed-term products available.
• Stocks and shares Isa: an investment account where all capital gains and income are protected from tax. If you are happy to ride the ups and downs of the market, you can make competitive returns over the long term. But the risk of market fluctuations mean this type of account may not suit those who are likely to need short-term acesss to their money. 
• Innovative finance Isa (Ifisa): a peer-to-peer lending account that works by matching investors with borrowers who did not want to (or could not) get a traditional bank loan. The borrower offers a rate of interest when paying back the money you've invested. The higher the interest rate, the higher the investment risk – you're not guaranteed to get all of your money back.
• Lifetime Isa: if your savings goal is to buy a home or to save for retirement, then this Isa allows you to save up to £4,000 each year, topped up by a 25% government bonus. The lifetime Isa allowance is included in your overall £20,000 Isa annual allowance. Lifetime Isas are restricted to those aged between 18 and 39, and to first property purchases.

For help making the right choice, read our guide on the different types of Isa.

2. Mix and match for the best returns

Savvy savers and investors can split their £20,000 allowance across multiple types of Isa. You could, for example, stash a portion of savings in the highest-interest cash Isa on the market and then play the long game by placing the rest of your allowance in a stocks and shares Isa.

Since 6 April 2024, savers have also been able to open and pay into multiple Isas of the same type annually. This replaced previous rules that only let you put money into one of each type of Isa every tax year. You can split cash Isa savings across an instant access account and a fixed-rate account that locks up your money for longer, for example. 

With cash Isas still enjoying rates of up to 5% AER, this extra flexibility may appeal to savers who have already opened an account but still have some remaining allowance to invest.

• Find out more: best cash Isas 2024

3. Use 'Bed and Isa' to shield your investments from CGT

Usually, when you sell investment assets, you'll pay CGT on any profits you make above a certain level (£3,000 for 2024-25) – a bill that could hit investors harder following the CGT hikes announced in the Budget. 

Isa savings and investments are exempt from all forms of tax, not just income tax. This means that stocks and shares Isa can help you sidestep paying CGT on investments. 

If you already hold investments elsewhere, you can't transfer them directly into your Isa. Instead you can opt to sell them, deposit the money in your Isa, and then buy the investments back within your tax-free account – a tactic known as a 'Bed and Isa'.

Bear in mind that there can be charges involved with buying and selling investments, and you'll generally receive slightly less when you sell an Isa than you'll have to pay to immediately buy it back. There's also a chance that the price will go up between your selling and buying it back, which could cost you. But the price could also go down, which could work to your advantage. 

You'll need to weigh up whether the tax benefits of the Bed and Isa approach outweigh any charges you might incur. 

• Find out more: what is a stocks and shares Isa?

4. Make it a family affair

If you've used up your annual £20,000 Isa allowance, but your partner hasn't, you can pay into their account instead, effectively increasing your shared Isa allowance to £40,000.  

If you want to save for your child, you could open a Junior Isa on their behalf. Junior Isas have an annual allowance of £9,000.

Between them, a family of four could potentially save £58,000 a year tax-free in Isa accounts.

If you are married or in a civil partnership, you have the added advantage of being able to transfer any sum of money to your spouse without triggering any sort of tax bill. 

Unmarried couples with assets and savings large enough to be liable for inheritance tax (IHT), on the other hand, should be aware that they can only gift a maximum of £3,000 a year to their partner (or anyone else) without it being added to the value of their estate. Any gifts worth more than this risk being subject to inheritance tax, unless you survive for seven years after the gift was made.