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The ISA clock is ticking! Act fast to make the most of your allowance

Posted on 29/03/2018, by Stuart Sheppard

It’s that time of year again: the new tax year is nearly upon us. Sure, it might seem a less exciting milestone than New Year’s Day. Only the most ardent of accountants will be ringing in 6th April with party poppers and bucks fizz...

But it does hold some cause for celebration: it’s on this day that the annual tax-free ISA allowance gets reset – meaning those who have been lucky enough to fill their ISA pot to the brim can start investing once more.

As a reminder, the ‘Individual Savings Account’ (ISA) is a tax wrapper that allows investors to earn tax-free returns on a certain amount of money each year. (Find them confusing? This ISA guide might help.)

Normally savers and investors have to pay tax on any interest that they earn at the bank, or returns that they realise through the stock market, so the ISA is a great way to make your money work as hard as it can.

Especially given that, provided you keep your money within the wrapper from year to year, you can carry on earning tax-free interest on the whole amount.

What with the effects of ‘compound interest’ (whereby you earn interest on your interest – what Einstein once called the ‘eighth wonder of the world’), the conscientious ISA investor can end up building a substantial pot over time.

Just take a look at Balbir Bagria, who managed to use his stocks and shares ISA to grow a multi-million pound portfolio. Remember, though, that investing carries risk, and you may get back less than you put in.

The amount that investors can hold within their ISA has ramped up dramatically in recent years; from £11,520 in 2013/14 to £20,000 last year (it’s going to stay at £20,000 next year, too). It’s great news for those looking to make the most of the tax-free opportunity.

Racing to the finish line...

Every year, in the two months of March and April, the interest in ISAs goes through the roof. Just take a look at the monthly variation in search volumes for the phrase ‘ISA’ since 2004.

What you can see is that search volumes spike massively in March and April, remaining much lower in the other 10 months of the year.

Part of this is because people will be using the time to shop around for the best ISAs on the market. (Remember, as well as subscribing £20,000 each year, investors can transfer existing ISAs across to new providers if there’s one they particularly like.)

It’s probably also a sign of investors rushing to fill their boots in the last month of the tax year, by investing any spare money that they hadn’t got round to putting away in the months prior.

If you do have some money to put in your ISA, it's certainly worth investing it before 6th April so it doesn't count towards next year's £20,000 allowance. But it’s always worth investing your ISA money as soon as you can, so that you benefit from as much tax-free growth as you can. Now is a good time to plan ahead.

So what are the options?

It’s safe to say that, when it comes to ISAs, most people think of either cash or stocks and shares. According to official statistics, of the £62 billion subscribed to ISAs last year (2016-2017), £61.5 billion of it was to one of these two.

 

But, on the back of the last decade of low interest rates, the popularity of cash has waned – Britons saved £18 billion less in cash ISAs in 2016/17 than in the previous year. And while rates are starting to rise, they’re still well below the rate of inflation.

It’s on the back of this trend that new ISA options have sprung up which could offer solutions to those looking to put their money to work, without investing in stocks and shares

Chief among them is the Innovative Finance ISA (IFISA), which allows interest earned through eligible peer-to-peer lending products to be included within the tax-free wrapper.

While it won’t be for everyone – you should only use peer-to-peer lending if you’re comfortable with a degree of risk – the IFISA could prove attractive to those who aren’t comfortable with the ups and downs of regular stock market investing.

We launched our own ISA in the summer of last year, and began allowing transfers of existing ISAs a few months ago.

But don't forget the risks

It’s important to remember that any investment puts your money at risk – it’s not the same as keeping your money in a savings account, and peer-to-peer lending isn’t covered by the Financial Services Compensation Scheme. There’s a risk that you could get back less than you initially put in. Tax treatment is dependent on the individual circumstances of each client and may be subject to change in the future.

So, make sure you are comfortable with the level of risk you’re taking. You should always keep any money that you need instant, guaranteed access to in a separate savings account – a rainy day fund – just in case anything should go wrong.