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Listen nowTime's running out to use your stocks and shares Isa allowance
The deadline to protect your money from the taxman is fast approaching
There’s just one month remaining to use your Isa allowance before the new financial year, which brings with it sweeping cuts to the tax-free allowances on investment returns.
By putting your money into an Isa, the interest or investment returns you gain are free from taxation.
Anyone over the age of 18 in the UK is entitled to put £20,000 into an Isa each financial year, and this can be spread across different types of Isas – though you can only have a maximum of one of each: stocks and shares Isas, cash Isas, lifetime Isas, junior Isas, and innovative finance Isas.
Your allowance won't rollover into next year – so once it gets to midnight 5 April, you'll have lost your chance.
Here, we take a look at why taking advantage of your stocks and shares Isa allowance – before time runs out – might help you get the most out of your money.
- Find out more:How to find the best stocks and shares Isa
Why should you get a stocks and shares Isa?
The primarily appeal of Isas is protecting your money from tax – income tax, capital gains tax and dividend tax don't apply to money within Isas.
But keeping your money in cash Isas means its spending power is likely to be eaten away by inflation.
The highest-paying instant access cash Isa currently available – paying 3.01% – lags far behind the inflation rate of 8.8% in January 2023.
Investing in a stocks and shares Isa gives you a chance of keeping up with inflation through higher returns, though you could also lose money.
You should also not invest if you don't have enough easily accessible savings for if something goes wrong, for example you lose your job and need some money to tide you over until you find another. So prioritise saving three to six months' worth of living expenses in an easy access account before you get started with investing.
Investing gives you more control over what your money does, since banks will invest your savings in things you have no say in. For example, you might want your money to contribute to something that has a positive social or environmental impact – which you could do through investing in ESG funds.
- Find out more:Stocks and shares Isa transfers
What if I already have a stocks and shares Isa?
If you already have a stocks and shares Isa, and have more money you'd like to invest, make sure to use up your Isa allowance.
You don't necessarily have to pick investments the moment you put the money into your stocks and shares Isa.
Many investment platforms now pay interest on cash kept in a stocks and shares Isa. Bestinvest is currently offering a bonus rate of 3.1% (equivalent to top cash Isas) if you transfer a cash Isa in full before the end of the tax year.
Long term, however, keeping money you don't want to invest in cash Isas will earn you better rates.
What tax changes will affect investment income in 2023-24?
If you've got investments outside an Isa, be aware that you could soon have to pay more tax on those investments – even if you haven't previously paid tax on them.
From 6 April 2023, the tax changes announced in Jeremy Hunt's 2022 Autumn Budget will come into effect, affecting how much you can earn from dividends and capital gains tax before you pay tax.
The allowances for both dividend and capital gains taxes were halved, although the rates for both remain unchanged.
Dividend tax
The annual tax-free allowance for dividend tax will be cut from £2,000 to £1,000 for the 2023-24 tax year, and reduced again to £500 for 2024-25.
For investments held outside an Isa, any dividend income above £1,000 across the financial year will be taxed. The rates of dividend tax are linked to income tax brackets, so the amount of dividend tax you pay will depend on how much you earn.
| Income tax band | Dividend tax rate |
|---|---|
| Basic rate | 8.75% |
| Higher rate | 33.75% |
| Additional rate | 39.35% |
Capital gains tax
The amount of tax-free allowance on capital gains tax (CGT) will more than halve in the 2023-24 financial year. It will decrease to £6,000 for an individual and £12,000 for a couple.
You need to pay CGT when you sell an asset, and the allowances are the amount of profit you can make from that sale before you're taxed.
| Type of capital gains tax allowance | Capital gain tax allowance 2022-23 | CGT allowance 2023-24 | CGT allowance 2024-25 |
|---|---|---|---|
| Individual | £12,300 | £6,000 | £3,000 |
| Couple's allowance | £24,600 | £12,000 | £6,000 |
The capital gains tax rate for the sale of an investment (unless it's a property other than your primary home) is 10% for basic rate income tax payers and 20% for higher rate payers.
- Find out more: Dividend tax calculator
Is a stocks and shares Isa worth it?
Though there are some exceptions, most do-it-yourself investment platforms offer a stocks and shares Isa for the same price as a general investment account (GIA).
There's no limit to how much you can invest in a GIA but any income, dividends or profits (capital gains) you make when you sell could be taxable, if they exceed tax free allowances.
If you made £2,000 in dividends this tax year, you'd be within the tax-free allowance. But next tax year, when the allowance falls to £1,000, you'd pay tax of £87.50, £337.50 or £393.50 – depending on your tax bracket.
Whereas the same amount of dividend income from investments in a stocks and shares Isa wouldn't cost you anything in dividend tax.
An Isa can also spare you from the hassle of filling out a tax return.
You can access money held in an instant access cash Isa whenever you like, whereas money invested in a stocks and shares Isa should ideally be left alone for five years to mitigate losses, though withdrawals are permitted.
- Find out more: What is a stocks and shares Isa?
Which stocks and shares Isa is best?
The best stocks and shares Isa for you will depend on how much you want to invest, how confident you are in making your own investment choices, and what is important for you from an investment platform.
If you have less than £50,000 invested, you might be best off with a platform that takes a percentage fee, like Vanguard or Close Brothers Asset Management.
But those with a bigger portfolio would probably be better off with a platform that charges a flat fee, like Freetrade or Interactive Investor.
Sometimes you need a bit of help to get started, so you might want to invest through a robo-adviser, otherwise known as 'do-it-for-me platform'. This is where your investment portfolio is chosen for you, often based on your answers to a series of questions that get a sense of what you're saving for and how comfortable you are with taking risks.
We've surveyed investment platform customers and compared prices, to pick the best – including two Which? Recommended Providers.
Investment platforms including Bestinvest and Hargeaves Lansdown are currently offering cashback for transferring Isas to them, but make sure they're the right platform for you first.
- Find out more: The best investment platforms in 2022
