Saving up for a deposit or to pay down a chunk of your mortgage? As we head into ISA season, make sure you take full advantage of these tax-free savings accounts.
The end of the tax year falls on 5 April, so now’s the time to take full advantage of your ISA entitlement. Knowing these things will help.
1. You have just 6 weeks to use up this year’s ISA allowance
You can stash up to £15,240 into an ISA this financial year without paying any tax on the interest you earn. But you have to invest the full amount by 5 April and your allowance can’t be rolled over into next year.
You can split your allowance how you like between a cash ISA and stocks and shares ISA. But you can’t pay into more than one of either of these accounts in any tax year.
Especially when you are saving hard for a deposit, this kind of breathing space is well worthwhile. But, while ISAs are valuable savings tools, the Personal Savings Allowance introduced in April, 2016, has put standard savings accounts in a more favourable light.
It means you can now earn up to £1,000 in interest just in a standard savings account before being charged tax. That’s if you’re a basic-rate taxpayer. If you’re a higher-rate taxpayer, you can earn the first £500 worth of interest tax-free. These caps are set to remain in place next tax year.
2. Your ISA allowance rises considerably from 6 April
The start of the new tax year on 6 April brings with it a marked improvement for ISAs, as a fresh tax-free allowance of £20,000 will be introduced. That provides greater opportunity to put more of your hard-earned cash away, entirely tax-free.
Meanwhile, any ISA savings from previous financial years will gradually be earning more tax-free interest (a bit like a fine wine) until you decide to pull the money out for a first-home deposit or to pay more down on your current home.
3. You can keep pace with house prices with a property ISA
You don’t need to limit yourself to a standard ISA.
Cash you pay into the account is pooled with other investors and held in a special fund, which is used to purchase buy-to-let homes across UK cities.
Your investment tracks movements in the value of these properties – and receives rental income on top. As the account is ISA-eligible, both your income and gains will be paid to you free of tax.
You can open an account with just £100 and the tax-free perk is capped to the standard ISA allowance.
Interested? Here’s the lowdown on the property ISA.
4. You get a tax-free cash bonus from the Government with a Help to Buy ISA
The Government has also done its bit to help. Its property-specific Help to Buy ISA allows you to save up to £12,000 tax-free – and receive a £3,000 tax-free bonus on top.
If you’re planning to buy a home as a couple, the perk doubles. You can set aside £24,000 through the scheme and get a maximum bonus of £6,000. Both of you will need to be a first-time buyers who have never owned a home (or part of one) before.
Here's the pros and cons of the Help to Buy ISA.
5. The Government’s Lifetime ISA launches on 6 April
If you’re aged under 40 by the start of the next tax year, why not consider the Government’s new Lifetime ISA?
Kicking off on 6 April, it allows you to save up to £4,000 specifically for a deposit (or retirement) each financial year tax-free, and get a £1,000 top-up from the Government.
You can slot away savings into a Lifetime ISA between the ages of 18 and 50. And, since you can save a maximum of £128,000 over this time, the most you can receive from the Government bonus is £32,000.
Here's the nitty gritty of the Lifetime ISA.