Whether you’re saving for a rainy day or looking to build a pension for your dream retirement, you’ll want to be smart and strategic with your savings.
A top priority in any financial plan should maximize savings as much as possible. One of the best ways to achieve this is to save money in an ISA (Individual Savings Account) and maximize your ISA allowance.
There are still many complex aspects to this efficient saving method, and therefore, you must know how to gain the most reward from the process. In this article, you’ll learn the ISA allowance and how to gain the maximum allowance for your own ISA.
What is the ISA Allowance?
The ISA allowance is the set amount of money you can pay into an ISA each year without paying tax on any earnings. ISAs are designed to provide you with a method of saving or investing tax-free money. Think of ISAs as essentially a ‘tax-wrapper,’ which shield contributions and funds earned from tax charges.
However, the allowance on your ISA restricts you from making contributions over a specific limit each year without having tax relief applied. For the current tax year (2021/2022), the ISA allowance is £20,000. Should you wish to contribute £30,000 to your ISA in one year, you will only receive tax relief up to the allowance and pay tax on the remaining £10,000.
There are several ISAs –shares and stocks ISAs, cash ISAs, innovative finance ISAs, lifetime ISAs – and each has this allowance applied. Despite the ISA allowance, there are various ways for you to maximize your ISA allowance, and gain the highest potential for savings each tax year.
It is important to note that any tax benefits depend on your tax position, and rules are subject to change.
How to maximize your ISA allowance?
Here are some of the best ways that you can maximize your ISA allowance:
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Use spouse contributions
The ISA allowance applies to every individual ISA, which means that you should consider investing in an ISA for both you and your spouse. With the combined allowance on each ISA, you could save £40,000 in tax-free contributions each year. Also, if one partner is earning more than you can, you can transfer assets within the allowance limit to your partner’s ISA within a tax charge.
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Manage higher-interest ISAs
Interest rates have fluctuated and moved over time, which means you might have some previous ISAs paying very low interest. A solution would be to consolidate your ISAs into a new, higher-interest one. Even after your contributions reach your maximum allowance, this would pay higher interest, thus increasing your total ISA savings.
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Invest in various ISA types
You can open up more than one ISA each year, and keep these ISAs going into the next year – where you can open up even more. You are only allowed to open one ISA of each type, each year (being one each of the four previously discussed). Therefore, consider diversifying your ISA investments each to increase the total amount of tax-free contributions you can make between all of your ISAs.
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Seek help from a financial advisor
The best possible way to maximize allowance and most effectively manage all your financial investments is to seek help from a financial advisor. Through expert planning and professional strategy, financial advisors can help you make the most of your finances, and execute your saving plans in the most cost-efficient, successful way.
For instance, after seeking financial planning advice, you will find that you are saving, investing, and planning most optimally, like never before.
The value of investments can go down as well as up and you may get back less than you invested. Any tax benefits will depend on your personal tax position and rules are subject to change.
