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Some good practices for making the most from your ISA this tax year

With the new tax year just starting, investing with the right approach can help you maximise your savings capacity over the next 12 months. Here are some handy tips that can help you make the most of your new tax-free allowance.

The new tax year is finally upon us, and many investors will be looking at new ways to maximise their tax-free allowance for the year ahead.

As you may know, the government currently allows UK residents to receive totally tax-free returns on investments up to £20,000 over the tax year.

So even if you already have £20,000 invested in ISA accounts, the new tax year means you’re entitled to invest up to another £20,000 this tax year and profit without paying any tax at all on earnings.

But how you manage your allowance over the next 12 months could make all the difference to your day-to-day finances and future savings.

Do you put all your eggs in one basket with one savings account? Or do you diversify across a range of separate accounts with varying performances?

Do you keep your full allocation in for the duration of the tax year? Or do you dip in and out to cover living expenses and unforeseen costs?

Saving and investing even when times are tough

We understand that times are tough for many right now. With an ongoing cost-of-living crisis, mortgage rate hikes for millions of homeowners, prices at the pump taking their toll and growing childcare costs for working parents, saving and investing may seem low on your list of priorities.

But, no matter how much you have, an ISA can really help take the sting out of the current financial situation. You don’t need as much as £20k this year to really benefit either – no matter how much, big or small, investing sensibly throughout the tax year could prove very beneficial to you and your loved ones come next April.

Depending on portfolio and fund performance, this could mean an initial investment that can compound over time contributing to building your wealth. Markets can go up as well as down but if you are here for the long term you can take advantage of expected returns that are at the moment the highest they have been for some time.

You can withdraw at any time totally tax-free with no fees to pay. And remember, all your savings are still protected by the same high regulatory standards as any normal high street bank.

Why now is the right time to start investing in your future

Stocks and Shares ISAs are, of course, a way of saving money and potentially earning interest or returns on investments through access to financial markets. Simply put, the longer your cash is in an ISA, the quicker it could start earning interest or potentially returns through shareholding. Investments come with risk but historically with a long enough time-horizon has proven to be an effective way to grow your capital.

Tax efficiency

In the Spring Budget this year, the Chancellor announced an increase in the annual pension allowance from £40,000 to £60,000, increasing the threshold for savers by a huge 50%. On top of this, he also removed the lifetime allowance in another boost to those looking ahead and saving for their retirement.

Additionally, new rules on Capital Gains Tax were introduced. As of this April, the Annual Exemption Allowance has more than halved from £12,300 to £6,000 and will be halved again to £3,000 in April 2024. This excludes funds held in ISAs, making investment via an ISA more attractive than traditional share dealing and other investment vehicles.

Our top tips for getting the most out of your allowance

Managing your allowance this year may seem like a minefield. But our team has put together a handy list of pointers to help you make the best money management decisions this year.

Utilise as much as your allowance as you can afford

Every new tax year represents the opportunity to invest the maximum allowance and potentially benefit tax-free. Of course, you should prioritise any urgent payments first before considering how much you’d like to invest. The more you save over the course of the tax year, the closer you get to reaching your future financial goals.

Work out a monthly budget that works for you

Many people don’t keep track of their spending as often as they ideally should. This can lead to bad budgeting habits, with you not knowing your incomings and outgoings each month. Keep on top of all your spending, including regular bills, rent or mortgage payments, weekly food expenses and other day-to-day costs. This should help you maintain discipline so that you have a set amount each month that you can invest or save over the course of the year. But make a plan and stick to it!

Save and invest regularly

Of course, the £20,000 maximum allowance is out of reach for many savers at the moment. But the key is to keep adding to your savings and investment pot little by little – there’s no need to place a minimum on your deposits, but use whatever you have to spare at the time so your accounts continue to grow.

One reason many people decide against investing regularly is that they try to time the market. When they see markets in decline, they decide not to invest; when markets are going up they want to invest but are usually ‘getting in’ after the move has happened. If you invest on a regular basis, regardless of market conditions, you should be able to reduce the risk of entering the market at the wrong time. Remember, investing and saving is all about the long term.

Invest with the future in mind

Fund performance is always variable. We understand that sometimes seeing your savings go down in the short term may be very concerning for customers. But our team of expert fund managers plan for every eventuality, tailoring portfolios to maximise performance in the long term.

Paying off your mortgage v active investment

If you’re coming to the end of your mortgage term, or have extra cash which you’re using to pay more than the minimum payment each month, it may make sense to put that money into savings and investments instead.

Generally speaking, historically long-term investment is still preferable in many scenarios, despite recent mortgage price hikes. If your returns on investment outstrip interest rates, then you’re better off paying your mortgage as normal while investing at the same time and giving your investments time to grow, especially if you’re looking to retire.

Diversify your portfolio

With all savings and investments, portfolio management is a question of balance. By having multiple portfolios you can spread any risk and reward more evenly, meaning you won’t be exposed to greater risk should a fund not perform as expected.

If you’re unsure – ask us!

Our team of consultants can help you navigate an ever-changing financial landscape. If you have a question, query or just want general investment and savings advice, we’re here to help you – all at no extra cost.

What to watch out for

The important thing to remember about your total allowance is that it can only be used across one of each ISA type. For example, you can’t have £10,000 in two stocks and shares ISA; but you could have £10,000 in one stocks and shares ISA and £10,000 in a cash ISA.

Also bear in mind the maximum of £20,000 across the entire tax year. Should you go over the tax-free allowance threshold, you will be subject to penalties and taxed on any earnings over that amount.

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*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.