ISA use it or lose it.

Use it or Lose it – manage your ISA allowance

One of the most amazing free gifts we get in the UK is an ISA (Individual Savings Account). This is a cool tax free savings wrapper, protecting you from having to pay tax on any future gains or income. There are however some strings attached to this generous gift. An ISA has an annual allowance that you need to use or you lose it. Hence my call to make sure you are managing your allowance each and every year. [Note: This post is very UK centric, feel free to skip if you are from another country and have no interest in UK taxation and savings incentives.]

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What is an ISA?

An ISA is a wrapper, that allows you to save or invest tax free. That means you do not have to pay tax on interest (from a cash ISA) or either dividends or capital gains (from a stocks and shares ISA). So you can shelter your income and capital gains from HMRC legally. This is a government devised method to reduce your tax bill. As an additional benefit you don’t even need to report it on your tax returns so they actually make the tax regime more simple.

There are different types of ISA available with the most common and original versions being the Cash and Stocks and Shares. Nowadays the options have multiplied; with the Junior, Help to Buy, Lifetime and Innovative Finance coming into being.  The newer ISA’s just add additional complication and the odd bonus. I don’t think they actually benefit the majority of people, and feel the government should concentrate on simplification rather than compilation. My personal opinion is that Stocks and Shares ISA is the master. This allows you to invest rather than save, and historically the stock market has outperformed cash. You can read about my evolution to an investor here. This blog is never going to be a guidebook, hence I defer to the masters at explaining all the details, much more eloquently than I could.

For a full and very detailed guide, here is the MoneySavingExpert article.

And here is the government guidance on ISAs.

Finally the Motley Fool also have a guide.

ISA Allowance

So the idea of a tax free wrapper sounds very generous, but surely they are some catches? Yes, every individual has an annual allowance. This year’s ISA allowance is £20k. Which I’m sure you will agree is a very generous amount. But here is the catch, this is a use it or lose it allowance. That’s right, you have to use each years’ allowance, or you will lose it. There is no roll over possible (unlike pensions, where you can use carry forward).

No other country offers such a generous tax exempt savings scheme. Although you could argue that this is due to our relatively high tax burden here in the UK. I see it as a clear indication, that the government want us all to save and invest more, hence they are offering us tax incentives to do so. Also to note, ISAs are a UK tax incentive, that doesn’t cross borders well. For example Americans in the UK still have to pay US tax on them, so please take your own circumstances into account.

Why you should Use it

Your personal allowance is an annual gift from the government and HMRC. This sort of gift is very rare, and shouldn’t be sniffed at. And the beauty of the ISA is that the wrapper works for life, so you are saving yourself tax this year, next year and so on on all those glorious compounded gains. This can add up to be a lot of future tax saved. So if you have the funds, you should definitely think about using your ISA. You can pay into an ISA from your income, or move existing savings and investments into an ISA wrapper for the future.

Don’t Lose it

Don’t delay, you still have time to act. You can find and open an ISA before the end of the tax year on the 5th April. Here is the call to action, there are only a few weeks left to get things sorted. Do you want to open an ISA? Do you want to top up your ISA? Now is the time to evaluate your finances and manage your annual allowance. If you don’t manage it, you will lose this years allowance in a few weeks time. And once it’s gone, you can never get it back.

How I use ISAs

I personally love the ISA wrappers. Given I have a high income and a high savings rate I am able to make full use of my ISA allowance. Since my investment approach is KISS (keep it simple stupid), I only have one ISA. Yes only one, and it is a stocks and shares ISA. I have transferred all my previous ISAs, even those that were cash, into this ISA. I practise what I preach on simplicity, it makes my day to day and keeping track so much easier.

At the start of the tax year I make monthly contributions to my stocks and shares ISA until I meet the annual limit. Then when I reach the limit I change to investing in my taxable account. I make sure I use the allowance each year, as I don’t want to lose it.

Over to you

  • Have you got an ISA?
  • What variety do you have, cash, stocks and shares or a new one?
  • Have you filled it as much as possible?
  • If you are not in the UK, do you have a similar tax incentivised savings scheme?

12 comments on “Use it or Lose it – manage your ISA allowance

  1. Very interesting. It takes work to figure out all the games that governments make us play to avoid taxes. So many arbitrary an and changing rules.
    If you take the time to analyse the rules in your particular country, it can have huge payoffs.

  2. A timely reminder for all, but as I’ve yet to figure out how to live comfortably on £10k a year, maxing out my ISA isn’t possible on my average salary! I think I might just manage to scrape in at a semi-respectable £15k, but that’s only with the various bits of income I’ve been getting on top of my main salary, ie from premium bond/lotto winnings, cashback etc.

    I used to only have cash ISAs, back when the interest rates were >5% but they weren’t used for long term savings, I dipped into them regularly for emergency funds and holidays. What I had left in them has all been transferred into my stocks & shares ISAs (I have two split between providers, invest in them in alternate years so I don’t break any rules). Unless the interest rates go back up again significantly above inflation, then I don’t think it’s worth my while having cash ISAs again.

    1. Hi Weenie, oops did I not say that I’m lucky enough to be able to max my ISA, but know others may not be. Your 15k contribution is a bit more than semi-respectable, I’d call it a badass effort.

      I also miss those days when interest rates were higher (although do I really, as my mortgage as much higher than as well DOn’t really fancy a 7% mortgage rate again).

  3. Completely agree with you ref use it or lose it and concentrating on the S&S ISA side as cash at 1% is just losing money with inflation running at 3% or so. Unfortunately I am not in your salary league like Weenie but its all about maximising your ISA allowance within your own salary range. All my savings go into either SIPP or ISA, it’s just not in the £20k league!

    1. Hi again, completely agree it’s about maxing what you can within your means. And the balancing act between SIPP and ISA can be quite complicated…yet ultimately we don’t really know what future generations will do with either of these.

  4. ISAs are ideal for future tax free income, especially if you can max them out like yourself. Great work

    It obviously depends on your own personal circumstances on how to allocate investments in ISAs, SIPPS, pensions etc., but like you said if you want to keep it simple ISAs are great.

    I don’t really have any money in ISAs personally as pension saving in SIPPs is a better choice for my circumstances. However my children have a LISA and Junior ISAs where I invested their child trust fund vouchers.

    1. Hi Fu Mon Chu, thanks for visiting. And yes, thanks for the reminder that everyone’s situations are different, and especially if you are nearer retirement age pensions can be a better choice. That’s cool that have given all your kids such a good start in life – they’ll be well set up with the savings mindset.

    1. Thanks for commenting. I agree, it’s fascinating to see how other countries do things. I love the US approach of calculating tax over a calendar year, much more simple that out April 6th to April 5th!

What do you think?