If you want to know how to maximise your ISA allowance in 2023/24, then I’ve got the answers. I’ll also cover everything you need to know from the capital gains tax, to junior ISAs and much more.
This guide contains the hard facts about this year’s ISA allowance and rules, as well as my top tips on how to manage your wealth in the most tax-efficient way.
Keep reading to find out more about this year’s ISA allowance.
Also consider: Find the best investment ISAs to maximise your allowance
- Maximise your ISA allowance this tax year
- Open an ISA account for £9.99
- Contribute as little as £25 per month
Important information - investment value can go up or down and you could get back less than you invest. If you're in any doubt about the suitability of a Stocks & Shares ISA, you should seek independent financial advice. The tax treatment of this product depends on your individual circumstances and may change in future. If you are uncertain about the tax treatment of the product you should contact HMRC or seek independent tax advice.
What is an ISA?
ISA stands for Individual Savings Account. You can lower your exposure to tax by using this financial product that banks and investment platforms offer. Because they’re designed to give individuals tax-free benefits, you can’t hold an ISA on behalf of someone else.
What you can do, however, is save or invest money using an ISA in an effort to grow your wealth in a tax-efficient way. Why would I want to do that? Simple: it makes it easier to save for retirement, get a deposit for your first property purchase, and hit any other savings goals you might have.
Is there capital gains tax to pay on ISAs?
No, you don’t pay capital gains tax on profits made within an ISA. This applies to profit made from cash savings (i.e., interest earned) and shares you sell for more than you bought them for.
Additionally, you don’t pay capital gains on dividends received from stocks bought via an ISA. You don’t need to declare these dividends on a self-assessment tax form because the money earned doesn’t count towards your annual dividend allowance.
For clarity, some publicly listed companies pay dividends to shareholders. These are payments from the company’s profits and are distributed according to the number of shares you own.
These payments are classified as income if stocks are held outside of an ISA and if they’re not reinvested in stock. However, any dividends and subsequent investments made via an ISA get sheltered from income and capital gains tax.
Do I pay tax on ISA withdrawals?
No, you don’t pay income tax on money withdrawn from an ISA. Any profits made from funds within your ISA limit don’t count towards your taxable income. A flexible ISA allows you to deposit and withdraw money whenever you like in the same tax year and not incur any penalties or affect your ISA allowance in any way. In this regard, it’s like a current account.
What is the yearly ISA allowance?
The ISA allowance refers to the amount of money you can deposit in an ISA in any one tax year while still remaining tax-free on any income generated from those savings or investments. The annual ISA allowance of £20,000 means you can deposit up to that amount in the same tax year.
For example, someone could choose to save a total of £10,000 in an ISA during the 2023–2024 tax year. This means they’ve got £10,000 left in their allowance for that year. They could choose to not put any more money into an ISA, or they could put up to £10,000 in a stocks and shares ISA, for example.
As long as you stick to the annual ISA limits, your money (and any interest accrued) will be sheltered from various types of tax, including capital gains tax. What’s also worth noting is that previous tax years don’t affect your current contributions.
So, if you hit the limit in 2022/2023 and we’re in a new ISA year, the amount of money you can contribute won’t be affected. The only thing to remember is that contributions across all ISA products count towards your ISA allowance.
It is important to keep in mind that you are only taxed on savings and investment income over the personal savings allowance threshold.
Can my ISA allowances be carried forward?
No, ISA allowances can’t be carried forward from previous years. The annual limit is a fixed amount that resets each tax year (April 6 to April 5). So, if the allowance for this tax year is £20,000, that’s the maximum limit, and it expires on April 5.
If you don’t use some or all of that amount, it’s gone, and you don’t get to carry over any remaining ISA allowance to the new tax year. Simply put, ISA allowances and tax benefits reset every new financial year.
Do ISA transfers count towards my yearly allowance?
No, an ISA transfer doesn’t count towards your yearly allowance. This means you can transfer an ISA from one provider to another without incurring any penalties.
Let’s say you have £1,000 in a cash ISA but feel like it would be better somewhere else. You decide to invest your money in shares. You could transfer the money to a stocks and shares ISA without incurring any fees. The money is already in the ISA wrapper, so it doesn’t’ contribute to the allowance.
As I’ve said, you can invest up to £20,000 in the 2023–2024 tax year across all products. Transferring funds from one ISA to another doesn’t affect this limit. So, if you see providers offering an additional permitted subscription or other flexible ISAs you like the look of, transferring your funds isn’t a problem.
Different types of ISAs
The main types of adult ISA are:
This is a savings account through which any interest earned is sheltered from income and capital gains tax. The minimum age for a cash ISA is 16. You can get a new cash ISA each year. So, in theory, you can have two cash ISAs (or multiple cash ISAs). However, you can only pay into one cash ISA in a single tax year.
It’s also worth noting that you can use easy-access cash ISAs. These products allow you to make unlimited penalty-free withdrawals each year. Money withdrawn loses its tax advantages but still contributes to your annual allowance.
Stocks and shares ISAs (Investment ISAs)
This ISA allows you to make investments without incurring income and capital gains tax charges. You can buy shares (equity) in companies, unit trusts, investment funds, corporate bonds, and government bonds.
As long as you’re within your yearly allowance, any profit on investments made in a stocks and shares ISA will be tax-free. The minimum age for a stocks and shares ISA is 18 (there are special exceptions for those under 18 who use a junior ISA). Note: You can lose money when you buy stocks, just as you can with any other financial security.
Innovative finance ISAs
An innovative finance ISA lets you make tax-free investments into innovative financial products such as peer-to-peer loans (loans issued via individuals instead of banks) and crowdfunding debentures (investing in a business by buying their debt). An innovative finance ISA may not be suitable for novice investors with small amounts of capital.
These long-term products have an annual ISA limit of £4,000 per year until you’re 50. You must open a lifetime ISA and make your first payment before you’re 40 (the age range is 18 to 40). You can use cash and/or stocks in this type of ISA.
The government adds a 25% bonus to your savings, up to a maximum of £1,000 each year. Your account can stay open after 50, but you don’t get the government bonus. However, the tax-free status of your funds remains, i.e., you still earn tax-free interest on your cash balance and investments.
What’s the junior ISA allowance?
A junior ISA is a financial product that allows children to take advantage of the annual savings allowance and avoid paying tax on savings interest earned. A child won’t be able to open the account, but an adult can open one on their behalf. So, if you’re a parent or guardian and want your child to enjoy the benefits of tax-free savings, you can open a junior ISA on their behalf.
These ISAs look very similar to adult ISAs in terms of savings and tax rules. Indeed, the government wants to encourage savers to hit their financial goals from a young age, so most banks and investment trusts will offer junior products with extra incentives.
Providers have their own specific ISA rules. The rules in place across cash and investment junior ISAs are:
- These products are available to people aged 18 or younger
- The account must be opened by adults (parents or guardians)
- The tax year runs from 6 April 2023 to 5 April 2024
- The annual allowance for 2023–24 is £9,0000. If you look back at the history of junior ISAs, the limits were less than £4,400 for more than five years. However, in 2020–21, the annual ISA limit was raised to £9,000.
- Only the named account holder can access the funds in a junior ISA. They can take control of their account at 16 and withdraw money once they turn 18.
- Anyone can deposit money into a Junior ISA. Contributions made by adults without affecting their own personal ISA allowance.
Why do ISAs have this set allowance?
ISAs have a set allowance each year to provide people with a tax-efficient way of growing their assets without providing the super wealthy with a tax haven. Growth of any assets outside of an ISA typically has tax implications.
This product is only possible because there is an annual limit. Without a limit, people would take advantage of the system, and that could have major implications for the economy.
How is the ISA allowance calculated?
Your ISA allowance is the sum of all your investments and must fall within the annual limit. If you’re allowed to invest £20,000 for the tax year, you can portion this allowance out across the different types of ISAs.
So, you could have multiple ISAs and spread your contributions like this:
- Cash ISA = £8,000
- Stocks and shares ISA = £8,000
- Lifetime ISA = £4,000
- Total investment = £20,000
You’re free to invest as much or as little as you like in a given tax year. What’s more, you can spread your funds as you see fit based on inflation, interest rates, current stock market returns, and your personal preference.
The tax year begins on April 5 and ends on April 6 of the following year. If your investments are made during this period and within the annual limit, you can do as you please.
ISA Allowance for 2023/24
The ISA allowance for 2023–2024 is £20,000. For those tracking the annual ISA allowance, you’ll notice that this maximum tax-free limit is unchanged from 2022–2023.
Using your ISA allowance in full
ISA holders should aim to get the maximum value from their annual tax-free allowance. All investments carry risk, and you should only commit funds based on your personal circumstances. Put simply, only use disposable income.
However, if you can use one, it’s a good idea for tax purposes. Moreover, if you can spread your capital, it’s often wise to split your ISA allowance across different products. Doing this allows you to get the benefits of savings interest and possible returns from investments.
Some people put all their money into one type of ISA, but most people will split their allowance. This is a good way to take advantage of the fluctuations that occur in different parts of the financial markets. For example, if interest rates are high, you might want to put more into a cash ISA. If interest rates are low, putting more of your allocation into a stocks and shares ISA might be better.
Does taking money out affect the allowance?
If an ISA is flexible, you are at liberty to take money out and put it back in during the same tax year without affecting your ISA allowance. If you do this with any other type of ISA, you will lose that portion of your allowance.
Other ISA limits and rules to be aware of
One rule to be aware of when it comes to withdrawals is that you will be charged a 25% penalty if it’s a lifetime ISA. So, you can withdraw funds from all other types of ISAs without incurring any penalties, but there are charges if you withdraw from a lifetime ISA.