The tax year is a matter of weeks away, with this falling on April 5, 2020. With February getting underway, it may be that some people are looking for ways in which they can make the most of their annual ISA allowance ahead of this key date.
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In the current tax year – which runs from April 6 to April 5 – the maximum a person can save in ISAs is £20,000.
It’s only possible to put money into one of each kind of ISA in each tax year, of which there are four types of ISA.
When it comes to a Lifetime ISA, eligible savers can put in up to £4,000 each tax year – until they reach the age of 50.
Ahead of the end of the 2019 to 2020 tax year, Clare Francis, Director of Savings & Investments at Barclays, has shared some top tips with Express.co.uk.
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ISA: The tax year end falls on April 5, 2020 (Image: GETTY)
She said: “The end of the tax year falls on the 5th of April which means there is still plenty of time to make the most of your allowance, ensuring you maximise the opportunities and avoid paying more tax than you need to in the long term.”
Tax-free ISA opportunities
The Personal Savings Allowance has been in effect since April 2016, allowing savers to earn a certain amount of interest tax-free.
Nevertheless, some people may decide an ISA is an option which suits them.
“You can open an ISA with as little as £1 and put up to £20,000 away this tax year,” Ms Francis explained.
“It’s important to remember you don’t have to invest the full amount, just put away what you can afford.
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“Whether it’s £200 or the full £20,000, the benefit of an ISA is that any money you make, whether it’s interest on cash or capital gains and dividends on investments, is tax-free.
“There are many different ISAs to choose from – Cash, Lifetime ISA, Stocks & Shares (which can also be known as an Investment ISA) and/or Innovative Finance. You can choose to put the full amount into one type of ISA or split it between several.
“Just remember, you just cannot open two the same type of ISA in the same tax year.”
“ISAs are also flexible so if you have money in ISAs from previous tax years, you can also move it to a new ISA account without it affecting this year’s ISA allowance.
“You will just need to ensure that the ISA you are looking to move money into accepts transfers, as not all do (restrictions on transfers are more common with cash ISAs than stocks and shares ISAs).
“Furthermore, the flexibility of ISAs applies to withdrawals as well.”
Ms Francis also pointed out a common mistake which some savers make.
ISA allowances reset as the new tax year begins (Image: GETTY)
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“Many people wrongly assume that once money is in an ISA, it’s stuck,” she said.
“However, this is not the case. Some have withdrawal restrictions however many don’t, meaning you can access your money whenever you want.
“With some providers, you can even take money out of your ISA and pay it back in without it affecting this year’s ISA allowance.
“Just make you check all these things before you open an ISA to find the one that is right for you.”
Earning interest on cash savings without paying tax with Personal Savings Allowance (PSA)
Ms Francis also detailed what the Personal Savings Allowance means for savers.
“With Personal Savings Allowance (PSA), basic rate taxpayers can earn up to £1,000 in interest each year tax-free, and higher rate taxpayers up to £500,” she said.
“Whilst additional rate taxpayers don’t have a PSA, you can receive up to £2,000 a year in dividend income without paying tax.
“This might be adequate for many, but if you build up an investment portfolio over many years, you may find that the amount you receive in dividends exceeds the annual allowance. If that happens, basic-rate taxpayers must pay 7.5 percent on any dividends above the £2,000 allowance. Higher-rate taxpayers pay 32.5 percent and additional-rate taxpayers pay 38.1 percent.
“Any money you make on investments is liable to capital gains tax (CGT).
“The standard CGT rate is 10 percent, while the higher rate is 20 percent. You have a CGT allowance every tax year (currently £12,000) which means if you sell any investments, you’ll only pay tax on profits above that amount.
“If your gains are less than that, or you plan carefully and stagger the sale of your investments over several years, you can avoid CGT.”