Key changes to savings allowances are coming up soon
ISA savers may want to revisit their savings(Image: Getty)
ISA holders could dramatically boost their savings through a simple change to how they use their accounts. A major advantage of these accounts is they are completely tax free.
Savers can pay in up to £20,000 annually into ISAs. Given the allowance resets on April 6 each year, account holders may wish to maximise their current allocation before entering the new financial year.
Andrew Prosser, head of Investments at investing platform InvestEngine, explained: “If you don’t use your ISA allowance before the end of the tax year, you can’t carry it forward, so that opportunity to shield money from tax is gone forever. Even if you can’t afford to contribute the full £20,000 allowance, it’s still worth putting in what you can because the benefits compound over time. Every pound invested within an ISA grows free from tax, which can make a significant difference to long-term returns.
“For people who have spare savings sitting outside tax wrappers, topping up an ISA before the tax year ends can be one of the simplest ways to make sure their money can earn interest or returns while still being tax-efficient.” Whilst many ISA savers might delay until the final moment and use their allowances as the tax year wraps up, making deposits at the beginning of the new year could prove beneficial.
Mr Prosser said: “Investing earlier in the tax year can give your money more time in the market, which increases the potential for long-term compounding. Every pound invested within an ISA grows free from tax, which can make a significant difference to long-term returns.
“For people who have spare savings sitting outside tax wrappers, topping up an ISA before the tax year ends can be one of the simplest ways to make sure their money can earn interest or returns while still being tax-efficient. Over many years, that additional time invested can translate into meaningful differences in the final value of a portfolio.
“People who invested their full allowance at the start of the tax year since the creation of ISAs in 1999 into a stocks and shares ISA could be almost £88,000 better off than those who invested last minute at the end of each financial year.” However, he emphasised that the key principle is to stick to your plan.
The most important habit
The investment expert said: “The most important habit is consistency. Whether you invest monthly, annually at the start of the year, or closer to the deadline, regularly using your ISA allowance is far more important than trying to perfectly time contributions.”
Those with stocks and shares ISAs may be worried about the Iran war and its potential impact on the economic markets in the coming months. But Mr Prosser stressed the importance of staying calm during these challenging times.
He said: “In times like this it’s easy to get spooked by a few big market falls, but it’s important to remember to stay focused on the long term. While your portfolio might be taking a few hefty knocks now or over the next few weeks and months, these market moves become much less relevant over 5, 10, 20 years or more.
“Trying to time the market by waiting for ‘the perfect moment’ rarely works in practice. Many of the strongest market recovery days occur very close to the worst downturns, so investors who sit on the sidelines risk missing the rebound.”
Market downturns provide opportunities
He offered another suggestion for growing your investment-based savings gradually. Mr Prosser explained: “For long-term investors, the key is usually staying diversified and focused on their time horizon rather than short-term headlines. Market dips can actually provide opportunities to invest at lower prices, particularly for those contributing regularly to investments through vehicles like stocks and shares ISAs.”
Significant changes are on the horizon regarding ISAs. From April 2027, the ISA allowance is being limited, so you can only utilise up to £12,000 of the allowance, split as you wish between cash ISAs and stocks and shares ISAs.
The remaining £8,000 must be allocated to investment-based accounts. There is, however, an exception to these new regulations. Savers aged 65 and above will retain the current £20,000 allowance.
