10 ways to make use of your ISA tax allowance in the new tax year

With a new financial year underway, have you considered how to make the most of your ISA tax allowance?

The ISA turns 25-years-old today (6 April). Historically, cash ISAs haven’t offered great returns for savers – especially when compared with the top rates being offered by savings accounts in light of the current 16-year high interest rate.

The frozen base rate has also made it very likely that millions of people will find themselves having to pay tax on savings interest. This will particularly affect those being hit by fiscal drag, which is pushing people into a higher tax bracket.

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So, it makes the £20,000 ISA tax allowance an attractive prospect for savers. But, according to financial provider Shepherds Friendly, around 53% of UK adults do not hold an ISA, with only one in seven people using their full tax-free allowance.

To make sure you enter the new financial year with your savings in the best shape, we've got 10 ways to maximise your full £20,000 ISA allowance.

10 ways to make use of your ISA tax allowance

Whether you want to save money, invest or save for your children’s future, there’s an ISA for all your needs. Here are 10 ways to take advantage of the allowance:

1. Save using a cash ISA

An estimated 1.3 million more people are set to be dragged into the higher 40% tax band this tax year according to the Office for Budget Responsibility. But any money in an ISA does not count towards your personal savings allowance (PSA).

The PSA was introduced back in 2016 and hasn't been uprated since. So, given we've had eight years of inflation - including the spike seen in autumn 2022 - the allowance has effectively shrunk in size.

Last April, the chancellor reduced the additional rate of income tax threshold from £150,000 to £125,140, pushing more people into the highest tax bracket. Here’s your personal savings allowance based on your tax band:

Savers can earn over 5% on cash ISAs right now, with rates reaching their highest point in 10 years. You can earn up to 5.17% with Plum's cash ISA or 5.07% AER with OakNorth Bank if you're prepared to fix for a year. Rates on traditional savings accounts are similar to cash ISAs, but with an ISA you get the benefit of the £20,000 tax wrapper.

According to Bestinvest, for every £100 in interest earned above the PSA on a standard savings account, a basic rate taxpayer would only take home £80. For higher-rate taxpayers, £100 in interest would leave just £60 after tax deductions, while a higher-rate taxpayer would only get £55.

2. Invest in a stocks and shares ISA

If you invest your money in a stocks and shares ISA, you will be protected from capital gains tax (CGT). Your dividend allowance also won’t be affected, as dividends earned through an ISA are not taxable.

The annual CGT exemption was lowered to £6,000 in the 2023/24 tax year, and this has been halved again to £3,000 for 2024/25. The tax-free dividend allowance has also halved to £500.

Alice Haine, personal finance analyst at Bestinvest, said: “Sharp cuts to the annual dividend allowance and capital gains exemptions at the start of the [old] tax year - with both [halving] again on 6 April – have been a wake-up call for savers and investors.

“Add the frozen Personal Savings Allowance into the mix and it means savers and investors are far more likely to pay tax on the money they have carefully stashed away, making ISAs more important than ever.”

According to investment platform Interactive Investor, trading volumes rose 14% year-on-year between 1 January and 25 March 2024, as more investors looked to use up their £20,000 allowance.

Providing some insight on what exactly has been popular this tax year, Myron Jobson, senior personal finance analyst at Interactive Investor, said: “Passive funds account for seven out of the top 10 bestselling funds on interactive investor since the start of the 2023/24 tax year.

"Four are from Vanguard’s stable, with Vanguard LifeStrategy 80% Equity ranking highest in third position."

3. Open your ISA now, invest later

If you’re looking to invest in ISA shares and funds but need more time to figure out your investment options, you can store your cash in a stocks and shares ISA.

After your money is stored in the ISA, you can invest it later. There are investment platforms that will pay interest on your ISA funds before investing, but it’s worth checking which ones will offer this.

Plus, there are some platforms have ISA transfer offers, including a cashback bonus of up to £2,500, when you open an ISA with them, subject to eligibility.

4. Open different ISAs for different goals

You can split your £20,000 ISA allowance by opening different types of ISAs, depending on your goals. For example, those aged between 18 and 39 years old can open a Lifetime ISA (LISA) and save up to £4,000 per year for their first home, or retirement.

The government then tops up 25% of your balance in your ISA each tax year. So, if you save a maximum of £4,000, the government would top that up by £1,000 that year. That leaves £16,000 each tax year to save in a different type of ISA.

After the age of 39, you can continue to save in the LISA for retirement and still receive the 25% top-up per year, up until the age of 50 . And if you aspire to become an ISA millionaire, you will want to open a stocks and shares ISA. See what ISA millionaires have been investing in on the popular platforms.

5. No need to declare ISA savings on your tax return 

You don’t need to declare any gains or income from an ISA when you do your self-assessment tax return. It means the process is that bit simpler and you'll have less tax to pay.

6. Open a Junior ISA for children's savings

If you have children, you can save for them in a Junior ISA (JISA). Though the tax-free allowance is capped at £9,000 per tax year in a JISA, it’s still well worth it as your savings are being shielded from the taxman.

Similar to adult ISAs, a JISA protects your savings from CGT and income tax. The money saved in a JISA can’t be withdrawn until your child turns 18 years old - at which point the account will turn automatically into an adult ISA. It’s a great investment for children, who, for example, can use the money to pay for a first home deposit in the future.

If you invested £9,000 per year for 18 years based on an annual interest of 5% in a JISA, you would end up with £269,048. Read more on how you can minimise the risks of a stocks and shares Junior ISA.

7. Use bed and ISA if you don’t have cash to invest right now

Please note, the deadline for bed and ISA in the last tax year has passed.

If you already have money held up in shares, and you don’t have any more cash to put into an ISA right now, you can use the ‘bed and ISA’ method.

If you have investments in the form of share certificates or in a General Investment Account, you can sell your shares or funds and repurchase them within an ISA. This means any future returns will be shielded from tax on up to £20,000 per tax year.

8. If you’re married, double your ISA allowance

If you’re married, you can double up your ISA allowance to £40,000 per tax year through ‘interspousal transfers’.

This means your savings and investments can be switched between you and your spouse without paying extra tax on transfers. When transfers are done between married spouses, this also isn’t flagged to HMRC, and it allows you both to shuffle what you would like to allocate to different ISA investments.

But do consider that when anything is transferred to your partner in their name, they have legal rights over the funds.

9. Invest regularly

Although there is a £20,000 limit on an ISA, it doesn’t mean you need to invest or save a lump sum of £20,000 in one go. You can drip feed your money depending on how much you can afford.

If you want to make use of the £20,000 allowance, you can transfer £1,666.67 per month, or set up a standing order for this amount to go into your ISA.

10. Take advantage of ISA flexibility

If you don’t want to fix your savings away and are looking for some flexibility, you can open an easy-access cash ISA, which traditionally gives you freedom with withdrawals without affecting the interest rate.

But, before opening an easy-access ISA, it’s worth checking the terms and conditions, as some easy-access accounts do impose restrictions on how many times you can access your money per year. For example, the Plum cash ISA offering a top-paying 5.17% AER is said to be easy-access, but only permits up to 3 withdrawals per year.

Also, it's worth considering a caveat with easy-access accounts is that the rate you earn on your ISA is variable, so it can change at any time depending on market movements.

The government has also made some small changes to the ISA, such as savers being able to open multiple ISAs of the same type. So it's worth keeping an eye on this in the 2024/25 tax year.