A short guide to ISAs in 2022-23

A short guide to ISAs in 2022-23

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Wealth Solutions in our Edgbaston or Warwick offices.

How can you get the most from your savings and investments? One great tool is your ISA.You can put up to £20,000 into your ISA(s) each tax year (April-April). However, many people are not using their ISA efficiently – limiting their real returns.

Below, our financial planners in Edgbaston and Warwick offer this short guide to ISAs for the 2022-23 tax year. We hope this is helpful as you consider the best way to use your account(s). If you’d like to speak to one of our professional financial advisers then you can reach us via:

T: Edgbaston 0121 446 5815
T: Warwick 01926 888091
E: [email protected]

What are ISAs?

An ISAs stands for Individual Savings Account and was introduced in 1999). Each UK resident is entitled to a £20,000 tax-free ISA allowance each tax year, although unused allowance cannot be “carried over” into the following years. This means that each person in a couple can have their own ISA allowance, combining to £40,000 per year. Bear in mind that the ISA limit can change.

ISAs come in different varieties. Each one is designed for a specific purpose and carries specific rules about how it can be used. In 2022-23, the main ones are:

  • Cash ISA. This is like a savings account, except any interest you earn will always be tax-free.
  • Stocks & shares ISA. Allows you to commit funds towards assets like equities and bonds without needing to pay tax on dividends or capital gains.
  • Innovative finance ISA. Enables investments into peer-to-peer (P2P) lending.
  • Lifetime ISA. Designed for first-time buyers looking to get onto the property ladder. It can also be used to save for retirement.

Which are the best ISA types?

In 2022, inflation is currently running very high (at 9.1%). This makes it impossible for the interest earned on cash savings to keep up. Currently, the best easy-access deals offer around 1.56% and fixed-rate accounts 3.45%, meaning cash would potentially lose value (in real terms) by 7.54% or 5.54%, respectively. Cash ISAs, unfortunately, tend not to offer better rates than standard savings accounts. It may be more efficient to use your £20,000 ISA allowance to invest in other assets.

Here, a stocks & shares ISA can be very useful. In 2022-23, capital gains tax (CGT) stands at 20% for Higher Rate taxpayers on chargeable assets gains outside of residential property (e.g. Buy to Let). Dividends can also be taxed at 8.75%, 33.75% or 39.35% depending on your tax band. Holding investments inside a stocks & shares ISA lets you sidestep these taxes.

Finally, the lifetime ISA (or “LISA”) can be tremendously useful for those looking to buy their first home. In 2022-23 you can put up to £4,000 of your £20,000 ISA allowance in a LISA. Also, the government will “top up” your contributions by 25% up to a maximum of £1,000 per year. This is setting aside any growth generated on your own from interest, dividends and capital gains.

How do I get the most from my ISAs?

As mentioned, a good starting point is to avoid holding cash in an ISA (although it is wise to hold 3-6 months’ worth of living costs in an easy-access savings account, for emergencies). The interest will not beat inflation in 2022, and most people will not pay tax on interest anyway due to their Personal Savings Allowance. This lets Basic Rate taxpayers earn up to £1,000 interest (outside an ISA) before tax applies; for those on the Higher Rate, the threshold is £500.

From here, your financial goals and situation are very important to determine how you should use the other ISA types. For instance, younger people looking to buy a property will likely want to focus their savings into a LISA (to get the government bonus). However, existing homeowners will not benefit from it (unless they have a partner or spouse who is a first-time buyer, and you both want to move in the future). The Lifetime ISA can be a helpful option for those looking to save towards retirement – for instance, those who are nearing their Lifetime Allowance threshold for their pension (since there is no total “cap” on ISAs). However, in many cases, it will be more tax-efficient to contribute to a pension when saving towards retirement due to the tax relief you get (20% for Basic Rate taxpayers; 40% for those on the Higher Rate).

Another important consideration is how to use your ISA allowance strategically alongside your other tax allowances. In particular, you can generate up to £12,300 in capital gains each year, tax-free, on chargeable assets held outside of an ISA. This may affect how you choose to build up your asset base (since only certain assets can be held inside of an ISA). For instance, you may choose to concentrate your equities and fixed-income investments inside a stocks & shares ISA whilst investing in other assets like Buy to Let, art or other collectables outside an ISA. This could free up more flexibility later to sell more assets in a given tax year, with less tax on gains.

Invitation

We hope this content has been informative and inspired you to develop your own financial plan. Please get in touch if you’d like to discuss these matters with us via a free, no-commitment consultation with a member of our team:

T: Edgbaston 0121 446 5815
T: Warwick 01926 888091
E: [email protected]

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