One of the fundamentals of good financial planning is to make use of your annual ISA allowance.
Thanks to its status as a tax-efficient product, funnelling money into an ISA protects your cash from tax, helping it grow faster and giving you more back when you want to withdraw your money.
If this is your first year holding an ISA, you might be wondering what happens when the tax year ends.
The ISA Basics
You have an annual ISA allowance of £20,000.
If you don’t use up all your allowance by the end of the tax year, you lose it.
Your £20,000 allowance can be spread across the 4 types of ISAs; Cash ISA, Stocks and Shares (Investment) ISA, Innovative Finance ISA and Lifetime ISA (LISA)
You can have more than one ISA, including multiple cash, stocks and shares and Lifetime ISAs.
On April 6th, your ISA annual allowance resets and you get £20,000 to use again.
The tax year runs from April 6th to April 5th the following year.
Most people will have a Cash ISA or a Stocks and Shares ISA. If you’re specifically saving to buy a home, then you might have a Lifetime ISA.
What happens at the end of the tax year?
Think of each tax year as a countdown clock. When the tax year ends, the clock simply resets. The new tax year starts the day after, and you can start using a new £20,000 allowance right through to April 5th the following year.
Your ISA that was ‘active’ - the one you were paying money into - on April 5TH is still open. It doesn’t just close. There is no ‘maturity’ date unless you’re using a fixed rate Cash ISA.
The tax benefits of your ISA continue for as long as your ISA is open, beyond the end of the tax year.
ISA Options at the start of a new tax year
Continue paying into your ISA
If you’re happy to continue putting money into it, this becomes your ISA for the current tax year. It simply rolls over. There’s nothing to approve or sign. As soon as you make a payment into it, you’ve assigned it as your ISA for the tax year.
Open a new ISA
Your alternative option is to basically put that ISA aside and open a new ISA with a different provider.
Let’s use an example to demonstrate:
In the current tax year, you have a Stocks and Shares ISA and you’ve contributed £5000 of your annual £20,000 allowance to it.
The new tax year starts. You decide you want to open a new ISA with a different provider.
You can now pay into both ISAs if you want to. Just make you don't pay in more than the overall £20,000 allowance. If you do, you may face a penalty charge.
Why might I want more than one cash ISA or stocks and shares ISA?
You might want more than one cash ISA to take advantage of different interest rates.
For example, one ISA provider might have a great interest rate for easy access. And another ISA provider might have a great rate for fixing your savings for a year. So the rules allow you to spread your money for your specific needs.
In terms of stocks and shares ISAs, you might want to spread your investments and having more than stocks and shares ISA with different providers could give you access to a wider range of investments.
Does transferring an ISA use up my annual allowance?
If you open a new ISA, you can transfer your previous ISA(s) to your new ISA without your current annual allowance being reduced.
Usually, transferring old ISAs keeps things simple as opposed to the admin of keeping an eye on various different ISAs over the years.
Transferring an ISA should usually be free but always check with your provider.
Let’s say you had an ISA last year with a value of £5,000.
You open a new ISA this year and start contributing money. At the same time, you decide to transfer last year’s ISA to this new ISA. That £5,000 does not reduce your £20,000 allowance by £5,000.
It’s simply taking your previous yearly contributions and consolidating them.
Can I transfer between a Cash ISA and a Stocks and Shares ISA?
Yes, you can transfer funds from a cash ISA to a stocks and shares ISA, and vice versa.
If you transfer an ISA that you have paid into during the current tax year to a new provider, you must transfer the whole balance. If you're transferring money from an ISA opened in a previous tax year, you can do a full transfer or a partial transfer.
If you're thinking of transferring funds from a stocks and shares ISA to a cash ISA, remember that you can typically hold cash within a stocks and shares ISA. Check the interest rate though as it may not be as good as a standard cash ISA.
Make sure that you follow the correct procedure for transferring. It's important that you don't withdraw funds as this will mean you lose the ISA allowance benefits. For example, if you want to transfer £5,000 and you withdraw it to your bank and then paid it into another ISA, this would use up £5,000 of your annual allowance.
Summary
When we're thinking of saving or investing, making use of our ISA annual allowance is good financial planning.
Regarding the end of the tax year, the main thing to think about is maximising your contributions within your allowance before the tax year ends, otherwise you'll lose it.
There's no need to do anything else in terms of admin.
