Is it Too Late to Set Up an ISA?
No, never! Allow us to explain why
Everyone who is a UK taxpayer and resident is entitled to an allowance that they can pay into an ISA every year, giving them the benefit of tax protected savings and investing. This tax year (22/23) it is £20,000. The annual allowance resets at the end of the tax year, on the slightly random date of the 6th April. But it’s never too late, and we mean never.
Let’s go into more detail on what ISAs are, how they work and why it really never is too late.
Basic rules of ISAs
ISAs allow you to save and invest without worrying about certain taxes like dividend, capital gains and interest. Once cash is in an ISA, it’s exempt from these taxes. You can choose whether you want to invest the full £20,000 annual allowance in one type of ISA, or you can opt to split the allowance between different types of ISA. If you split it, you cannot invest more than a total of £20,000 across the different types. You also cannot pay into more than one type of ISA within one tax year. So, if you’ve got a stocks and shares ISA that you’re paying into this tax year, you can’t open another stocks and shares ISA with a different provider and start contributing to both as this would be against the ISA rules.
Where can I get an ISA?
There’s literally thousands of ISAs out there, and there’s lots of different places you can look to find one. You can get an ISA from the high street banks, building societies, financial advisories, as well as other peer to peer lending and crowdfunding companies. We have hand picked some of our favourites which you can find here, but you can also do your own research and weigh up the various pros and cons with comparison websites.
How can I open an ISA?
You can open an ISA online, over the phone or by directly walking into one of the providers offices, if that option is available with them. They will ask you for some basic personal details, including your National Insurance number and will also make sure that you have sufficient funds to transfer, if they have a minimum set up amount.
Different types of ISAs
On the 6th April every year, your ISA allowance resets and if there was any part of the allowance you did not use, it's gone. For example, if you invested £15,000 into an ISA this year, you would have £5,000 remaining of the allowance. However, when the clock strikes midnight on the 5th of April your ISA allowance is refreshed to £20,000. The £5,000 you had left over from the previous tax year is gone and will never return.
To recap, ISA investments are tax free. The interest and growth are tax free and if you take any income, it is tax free. Therefore, if you make use of your allowance, as and when you can, you are building up a tax-free investing portfolio. Pretty amazing!
Let's run through the different ISAs available:
This is basically a cash savings account that has the benefit of the interest earned being tax free. Some cash ISAs will allow you to access the funds instantly, and some will have fixed terms in exchange for higher interest rates. Generally the longer that you lock your money away for, the higher rate of interest you will receive. Cash ISAs can be really useful for shorter term goals, or storing cash that needs to be relatively easily accessible.
Stocks & Shares ISA
Within a stocks & shares ISA you can access a wide variety of investments, to hopefully give your money the chance to grow. This can include stocks, funds, ETFs and managed portfolios (where a robot or a team of experts chooses the combination of investments). This type of ISA is riskier than a cash ISA as investments can go up and down in value. If the investments within your stocks and shares ISA grow, when you come to sell them you will not pay any capital gains taxes. If you also receive any dividends from stocks or funds, you won’t need to stress about dividends taxes as they’re protected by the ISA. What’s not to love?!
Lifetime ISA (LISA)
The LISA was introduced in April 2017 with the aim of helping people buy their first home or save for retirement. It replaced the old Help to Buy ISA, which also helped first time buyers get on the property ladder. The LISA comes in either a cash or stocks & shares format, allowing you to choose either a rate of interest in the cash version or investments in the stocks and shares.
To open a LISA you will need to be aged between 18 and 39 and once it is open you can save every year until you are 50. The slight downside is you can only invest up to £4,000 into a LISA every tax year (plus £16,000 into other ISAs, using the £20,000 annual ISA allowance).
But here’s the good news. With a LISA, the government will add a 25% bonus on top of your contribution, up to a maximum of £1,000. So if you put the full permitted £4,000 into a LISA, it will really be worth £5000 thanks to the government, plus any interest or growth that you’re making on the LISA. You can then withdraw the funds from the ISA to buy a property up to the value of £450,000. Alternatively you can wait until you retire and withdraw the funds after the age of 60. If you do not take the money out to buy a home or fund retirement, there is a 25% withdrawal charge, so you lose the bonus and potentially interest gained.
Junior ISA (JISA)
Junior ISAs are specially designed for children under the age of 18. A parent or guardian must open a JISA in the child’s name, and from there other relatives can make contributions. You can choose to have either a cash JISA or stocks & shares JISA. Currently the limit for a JISA is £9,000 per year.
This is for each child, so if you’ve got three children and you open three JISA’s in each of their names, you’ve got a total of £27,000 to split between the three £9,000 allowances. Here’s the slight catch – any money saved cannot be withdrawn until the child turns 18. At this point, the money will move automatically into their name and their control, which means if you don’t want your child to potentially do something you wouldn’t approve of with the cash, the JISA might not be the best option.
5 reasons why it’s not too late to start your ISA
1. Take advantage of the annual ISA allowance
It’s a use it or lose it situation! Whilst it’s never too late, you can’t get back previous years of ISA allowances. If you don’t put £20,000 into ISAs this year, then you’ve essentially missed out on the opportunity to have that money saved in a tax free environment. You will have your £20,000 again next year (happy days) but you won’t be able to get back previous years.
2. Rates increase in ISA season
Often between March and April, right before the new tax year and the ISA reset date on the 6th April, the interest rates in cash ISAs creep up, as the providers want to incentivise savers to put the money in the ISA. If you’re getting close to this period, you might also be able to benefit from higher interest rates.
3. Take advantage of compounding
There’s a well known phrase when it comes to investing: the best time to start was yesterday, the second best time was today. The reason for this is because the sooner that your money can start growing, the sooner you can start taking advantage of compounding. In a nutshell, the more money that there is to grow, the more it will grow.
4. Tax benefits all year round
One of the great things about ISAs is that the tax benefits don’t go away, they’re there all the time! Any growth that you see and any withdrawals that you make (whilst a UK taxpayer) won’t be taxed. It’s never too late to take advantage of these tax benefits, so get enjoying them all year round.
5. Dollar cost averaging
Last but not least, you can include contributing to your ISA as part of your dollar cost averaging strategy. AKA, take advantage of regularly saving and riding out the highs and the lows of the markets.
The bottom line
ISAs are a magical tax beneficial scheme that we have in the UK, making saving and investing simpler and more effective than if you go without. Whilst it’s never too late and there’s no bad time, there’s no better time than the present. The sooner that you start, the more your future self will thank you.