The start of the tax year is a good time to take stock of your investments, reevaluate your financial goals and make any changes necessary to hit the ground running.
For investors, the dawn of the new tax year means the resetting of the £20,000 ISA allowance. The allowance, a tax-free wrapper for investing into an ISA, is something that anyone with the means should consider taking full advantage over the course of the 2023/24 tax year.
In this article, we’ll take a look at the ways in which you can take advantage of your ISA allowance and whether or not timing makes much of a difference. First, though, we’ll go through the basics of what the allowance is and how it works.
How do ISAs work?
ISA stands for Individual Savings Account. The main difference between an ISA and any other savings account is that anything held within the ISA grows tax-free.
There are four main types of ISA:
- Cash ISAs
- Stocks and shares ISAs
- Innovative finance ISAs
- Lifetime ISAs
While you can pay into each of the different types of ISA in any tax year, you can’t pay into more than one ISA of the same type. For example, you can only pay into one Stocks and Shares ISA in the same tax year.
In the current tax year, you can save up to £20,000 in an ISA. This limit is set by the government and can change from one financial year to another. The limit was raised from just over £15,000 in 2017 to give investors more to play with each tax year.
For more information on how ISAs work, check out our ISA Guide for the 2023/24 tax year.
Use it or lose it
If you don’t use your whole ISA allowance in any given tax year, the remaining allowance is lost.
For example, if you invest £15,000 into a stocks and shares ISA and nothing into any other type of ISA, then the remaining £5,000 allowance can’t be rolled over to the next tax year.
This is why it’s always worth reviewing your investments before the end of the tax year, to ensure you’re making the most of your allowances.
How to make the most of your ISA allowance
If you’re planning on investing this tax year, then now’s the time to consider how best to use your £20,000 allowance.
You might want to start by reviewing what you’re already invested in.
As part of this review, a sensible starting point is to ensure your current investments are in line with your risk profile. Determining your individual risk profile involves assessing factors including how long you’re investing for, how reliant you are on your investments, and your attitude towards risk. If you’re willing and able to tolerate high amounts of risk in your portfolio, then your portfolio should consist mainly of equities. If not, then it should consist of low-risk investments including bonds.
It’s important to ensure your asset allocation matches your risk profile, or you run the risk of either investing in a portfolio which is too risky, or not risky enough. A portfolio which is too risky may result in you selling your investments when the market falls, locking in losses, rather than staying invested for the long term. Investing in a portfolio which is too low-risk means missing out on returns which could have been earned had you invested in a higher-risk portfolio, and thus runs the risk of not meeting your investing goals.
If you aren’t sure how to assess whether your investments align with your risk profile, our managed portfolio service involves a comprehensive risk profiling questionnaire to ensure your portfolio is matched to your unique circumstances.
When reviewing your current investments, it’s also worth considering whether you’d like to manage your own investments, or have somebody else manage your portfolio for you.
While it’s never been easier to manage your own portfolio, many investors feel they lack the time, knowledge, or confidence to do so. A portfolio review before the end of the tax year provides an opportunity to evaluate whether you’re happy taking on management of your portfolio, or would rather save the time, hassle, and energy by outsourcing management to an expert. If this is the case, InvestEngine offers a range of portfolios managed by our team of investment experts.
Finally, as part of your portfolio/ISA review it may also be worth considering whether you’re happy with your current choice of investment platform. Investors will value different things when it comes to what they look for in their platform – whether that be ease of use, customer service, cost, or range of investment options. A portfolio review provides a chance to re-assess whether you’re happy with your current provider, and investigate whether there are any more suitable alternatives available on the market.
Is now the right time to invest?
When considering making investments into an ISA, a natural question is whether now is the right time to be investing.
Investing can seem like a daunting prospect, especially given there’s always at least one seemingly major geopolitical crisis on the horizon which could conceivably cause markets to fall.
But despite the potentially scary headlines, markets have always risen over time. The longer you have to invest, the larger your potential return will be. Even if you invested at the worst possible time (say, the day before a major market crash), over a long enough period markets have historically recovered their losses and investments have increased exponentially over time.
Given it’s impossible to predict when and where market crashes are going to occur, avoiding trying to time the market is a sensible strategy. Either investing a lump sum immediately (which is the mathematically optimal strategy), or drip-feeding cash into the market (which may prove to be the behaviourally easier strategy to execute, particularly with larger sums), both are excellent ways to give your portfolio the best chance of growing over time.
Avoiding market timing by investing early also means being able to make full use of your ISA allowances. If, in the process of waiting before investing, you don’t use your full ISA allowance, then the remaining allowance is lost. Ensuring you maximise the value of your investments in tax-free wrappers, like ISAs, is important for reducing the value of your investments subject to tax, and therefore increasing your returns.
If you prefer a drip-feeding approach to investing, then investors are now able to make use of the “cash on account” function. This lets investors deposit cash with InvestEngine within an ISA wrapper, and this cash can then be invested at a later date. This ensures the ISA allowances are fully utilised, while giving investors flexibility to determine the timing of their investments.
Capital at risk. The value of your portfolio with InvestEngine can go down as well as up and you may get back less than you invest. ETF costs also apply.
This communication is provided for general information only and should not be construed as advice. If in doubt you may wish to consult a professional adviser for guidance.
Tax treatment depends on personal circumstances and is subject to change, and past performance is not a reliable indicator of future returns.