Five tips to boost your Isa: SIMON LAMBERT’S quick guide to finding the best cash savings rates – and how investors can avoid a looming tax raid
The deadline for sorting your Isa is closing in thick and fast, with the end of the tax year now just six weeks away.
On 5 April, this year’s £20,000 Isa allowance will run out and any amount that you haven’t used is gone.
The good news is that as the clock chimes midnight, savers and investors will get a new £20,000 Isa allowance from 6 April, but you should still try to use as much of this year’s as possible before then.
This is something that is even more important now, as more people risk having more of their wealth outside of an Isa taxed.
Don’t delay: It’s time to boost your Isa, use your allowance and avoid a looming tax raid
Much higher savings rates mean it has become much easier to hit the annual personal savings allowance of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers.
Above those levels, savers will lose 20 per cent and 40 per cent of their interest in tax, respectively.
Meanwhile, Chancellor Jeremy Hunt is staging a double tax raid on investors in the new tax year.
The capital gains tax-free allowance will be slashed from £12,300 to £6,000 and the dividend tax-free allowance will be cut from £2,000 to £1,000.
There is even worse news a year down the line when the capital gains tax allowance dives again to £3,000 and the dividend allowance falls to just £500.
For the sake of your long-term wealth, it pays to hold investments in a stocks and shares Isa and not lose a chunk of profits and dividends to tax – and then see the potential effect of that compound over the years.
The problem for most people, of course, is they unlikely to be able to use their full £20,000 Isa allowance.
How many of us have the means to save or invest £20,000 of new money into an Isa each year?
This leads to the temptation to file using up your Isa allowance in the pile marked ‘not-my-problem’, but for many it might be possible to use more of their annual allowance than they think – often by recycling old money.
Here are my five tips to boost your Isa – and read our Isa Investing and Saving channel for more ideas.
Get the best rate for your cash Isa
Savings rates have improved dramatically over the past year. They still can’t match inflation but narrowing that gap as much as possible is essential.
The top easy access cash Isas pay more than 3 per cent and the best one and two year fixed deals scrape past 4 per cent.
Legacy Isa savings are likely to be on much worse rates than this, so check the best deals in our cash Isa savings tables and move your money.
Transfer old cash Isas
Don’t make the mistake of taking your money out and paying it into a new cash Isa though, as this eats up your Isa allowance. Instead use the official Isa transfer system to move funds. This is much quicker and easier than it once was.
You can also transfer old cash Isa savings to a stocks and shares Isa if you want to.
Move savings pots into a cash Isa
If you have savings you want to keep in cash but that are now at risk of getting caught in the savings tax net move some of that money into the shelter of a cash Isa. You might be surprised by how much of your Isa allowance this can use up.
Rates on cash Isas are lower than standard accounts, but the gap has narrowed – and remember if you end up paying tax on interest, you are likely to lose any benefit from a higher non-Isa rate.
Read our Five of the best cash Isas round-up for our picks and bookmark it, as it is updated regularly.
Sell your investments and get them into an Isa
As I said earlier, there is a major capital gains tax and dividend tax raid looming, so if you have built up investments outside of an Isa, move them into the safe harbour of a tax-free wrapper.
You can do this through a process known as a Bed & Isa, which means you can sell and buy back the same investments.
By doing this you use up some of your Isa allowance and some of this year’s capital gains tax allowance. For those with healthy profits outside of an Isa, this could be a wise move before the tax-free amount is more than halved on 6 April. Read our guide to the best and cheapest stocks and shares Isas.
If you don’t own a home, consider a Lifetime Isa
The Lifetime Isa was designed as halfway house between saving for retirement and a first home.
I think it’s a bit of a ‘meh’ product for retirement saving, I’d argue investing in a pension is your better option there. But for first-time buyers a Lifetime Isa is a no-brainer.
That is because contributions get an automatic 25 per cent top-up – taking you back to the position before basic rate tax. This is a great instant return. Remember though the money must either be withdrawn for a deposit on a qualifying first home or after the age of 60, or there is a hefty penalty.
You can pay up to £4,000 a year in to get the 25 per cent bonus and must be under 40 to open one. Read our Lifetime Isa guide.