With the end of the tax year fast approaching, now could be a great time to make the most of your tax-free allowances on Individual Savings Accounts (ISAs). Here, we outline how to take advantage of your allowances and how apps like Starling and Wealthify can make investing simpler. 

What is an ISA?

An ISA is a tax-efficient way to save or invest. A cash ISA offers tax-free interest payments and a stocks and shares ISA offers tax-free returns.

However, there’s a limit to how much money you can put into an ISA each tax year. The ISA allowance for the 2020/21 tax year is £20,000.

To contribute to your ISA, you can either make regular weekly or monthly payments, or transfer a lump sum. For example, you could set a savings target for your ISA and use the Starling Spaces feature to put money aside. Then transfer the savings over when your goal is reached. 

You could even switch on Starling Round Ups, to help you reach your target more quickly. The Round Ups feature adds spare change to your chosen Space - spend £5.50, set aside 50p automatically. 

Make sure you understand the different ISA rules

Cash ISA

With a Cash ISA, you can contribute up to £20,000 per year, and earn tax-free interest on this sum. This allowance can either be used just for a Cash ISA or split between a Cash ISA and other types of ISA, such as a Stocks and Shares ISA or Lifetime ISA.

Stocks and Shares ISA

If you want to give your money the possibility of more growth potential, a Stocks and Shares ISA could be a great option. You don’t need to pay tax on any profits you make and since it’s not a fixed interest product, there’s a chance for higher returns.

Remember, with investing, returns aren’t guaranteed. The value of your investments can go down as well as up, and you could get back less than invested.

Lifetime ISA

A Lifetime ISA (LISA) can only be used to save for your first home and/or retirement, as long as you’re under 40. With a LISA you can put aside up to £4,000 per tax year and every month, the government will give you £1 for every £4 you put in. The LISA allowance is included within your total £20,000 ISA allowance, meaning if you were to use it fully, you would still have £16,000 left for other types of ISAs.

Junior ISA

A Junior ISA is a great, tax-efficient way to plan for your kids’ future. Each tax year, you can add up to £9,000 on behalf of your child, split however you like between a Junior Cash ISA and a Junior Stocks and Shares ISA. 

Before you set up an ISA

It’s a good idea to clear expensive debt first, and build up savings that can be instantly accessed in times of need, before you start contributing to an ISA. 

When you’re ready to start investing, shop around. A great place to start is the Starling Marketplace, where you can find a number of ISA providers, such as Wealthify, which offers Stocks and Shares ISAs, Junior ISAs, and the option to invest ethically.

If you connect an existing Wealthify account or sign up through the Starling Marketplace, you’ll be able to check your investment balance from the Starling app. If you set up a scheduled payment from your Starling account, you’ll also receive a notification the day before your ISA contribution is sent and immediately after the money has been transferred. 

It’s never too late to use your allowances

This tax year’s ISA allowances will disappear from midnight on Monday 5 April. So, if you haven’t used your 2020/21 allowances yet, now could be your chance to put your money to work. 

Remember that it’s up to you how much you invest and don’t worry if you can’t afford to put £20,000 aside – it’s possible to build a decent nest egg for the future with small sums, especially if you contribute on a regular basis and keep up the effort in the long run.

The above article is intended as general information and does not constitute advice. You should take independent advice if you have any questions about your specific circumstances.

The tax treatment depends on your individual circumstances and may be subject to change in the future. Please remember, the value of your investments can go down as well as up, and you could get back less than invested.

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