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Taking Advantage of the UK ISA Allowance Before the Tax Year Ends

Contributed by Sussex SEO
27 March, 2019

In the next few weeks, one UK tax year ends and the next begins. This time of year is often busy for all UK taxpayers, working out any last minute strategies available to accomplish some degree of tax savings. The Individual Savings Account, or ISA, is one of the handful of accounts that UK residents can use each tax year to reap some valuable benefits. However, taxpayers only have until 5 April to make a decision on if they'll use their ISA allowance or lose it forever.

That's because the annual allowance for an ISA only extends to the end of the tax year. Taxpayers can add up to GBP20,000 into ISAs, but any unused allowance for the year does not roll over to the next. Those who are considering adding more tax-benefited savings to their coffers should plan to do so now, with some of the following benefits and considerations in mind.

Benefits of ISA Savings

Having the ability to set aside GBP20,000 into an individual savings account each year may not be a top priority for many, but some experts argue it should be. ISAs offer tax savings that are hard to find elsewhere. For instance, any gains on an ISA, either from interest or investment performance, is tax-free while the funds are in the account, and tax-free when withdrawn.

Taxpayers who use an ISA for tax-free savings may also benefit from flexibility. Some ISA providers allow individuals to put money in, up to the allowance each year, but also take money out when it is needed. Always check with the ISA provider to determine contribution limits after taking money out.

Your ISA Options According to a finance specialist at Money Pug, a website that helps taxpayers compare ISA rates, there are different types of individual savings accounts on can choose from to make contributions. A cash ISA can hold savings accounts from banks and building society accounts. In most cases, these ISAs provide a fixed rate of interest and steady growth, all with the tax-free benefit provided by ISA vehicles.

An alternative is a stock and shares ISA. This savings differs in that individuals own shares in companies, corporate or government bonds, or unit trusts and investment funds within the account. Stock and shares ISAs can generate more of a return over time, but unlike cash ISAs, they don't provide a steady return on the account balance.

Taxpayers should know that there is no requirement to choose one over the other. So long as the annual allowance is not exceeded for the year, someone can have a cash ISA and a stock and shares ISA in the same year. Both offer the same tax benefits, and both must be topped up by the tax deadline of 5 April if you want to take advantage of the full allowance this year.

How to Choose

Making the choice between adding money to ISA, either cash or stock and shares, comes down to the risk one is willing to take on with their savings. Cash ISAs are a smart choice for those who want tax savings on interest earned, but who may need the money in the near future. You can use funds in a cash ISA to cover financial emergencies, like a car repair or an unexpected bill, without giving up tax benefits. The downside is that cash ISAs may not earn much given the relatively low interest rates across banks and building trusts. Stock and shares ISAs may be a strong option for those who want more of a return on their tax-free savings, but who can also withstand the risk. Shares in companies, bonds, and investment funds can lose value, making stock and shares ISAs more volatile over time.

Topping up an ISA for the year, or opening one to make a smaller contribution, is a good idea for taxpayers in the UK who want to save on interest and investment gains taxes on idle funds. The ability to tax money out of an ISA should it be needed offers flexibility that cannot be found in other long-term savings options, and the tax-free growth helps money compound over time. Regardless of the type of ISA selected, make the contribution to take advantage of the annual allowance before the tax year comes to an end.


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