As the new tax year begins on 6th April 2016, each person has a new ISA allowance. This remains unchanged for adult investors – we each have £15,240 available to shelter from tax. We examine how you can make the most of your ISA allowances, including when you should sell from existing investments to fund your next ISA.

This article features data for the 2016/17 tax year, although some references are relevant for the 2017/18 tax year.

Key points

  • The ISA allowance for April 2016 is £15,240 for adults
  • The Junior ISA allowance is £4,368 for April 2019
  • The ISA allowance will rise to £20,000 for Adults from April 2017 onwards
  • How to use your ISA allowance properly
  • What we do for our clients at “ISA season”

ISA allowance for April 2016

Each person has an annual ISA allowance of £15,240 for the 2016/17 tax year (from April 6th to the following April 5th). Since each person has this ISA allowance, a married couple can each shelter £30,480 from tax.

You can shelter your savings or investments from tax, meaning that your ISA will grow free of income tax and capital gains tax. More importantly, your ISA income or capital withdrawals will also be free of tax – a useful advantage over pension plans.

The allowance for Junior ISAs for those aged under 18 is £4,368 per child, per tax year.

Read more about ISAs here.

ISA allowance for April 2017 onwards announced

Your ISA allowance for the next tax year in April 2017 will rise to £20,000 per person, per tax year. Therefore, a married couple could save up to £40,000 per tax year free from income or capital gains tax.

How to use your ISA allowance properly

We often read that “ISA season” is in March as each tax year comes to an end. People rush to use up their ISA allowance before they lose the unused balance forever. Of course, if you have not used your ISA allowance fully by the end of the tax year and have the funds available to do so, then of course you should.

More importantly, for us, ISA season is in April each year. You should use your ISA allowance as soon as possible in the tax year. That way you get more out of your tax-free allowances – effectively a whole year of zero tax. Over a lifetime this will really add up.

Don’t forget that you can transfer ISAs, so your decision is not final. You can always set up a cash ISA quickly with your bank, and then transfer the balance within the tax-free wrapper to a new account later.

What we do for our clients at “ISA season”

Each year we do the following for our clients as one tax year ends, and the next one begins:

Remind you to use unused allowances

If you have not fully used up your annual ISA allowance for that tax year, we will prompt you to use the outstanding balance before the end of the tax year.

Set up ISAs for the new tax year

Provided you have taxable funds available, either in general investment accounts, or cash, we will arrange for your new ISA allowance to be completely used up at the earliest opportunity. This effectively moves taxable money into a tax-free environment, without the need to change anything else.

We agree the strategy in advance so that it can all happen in the background. You just agree the strategy with us, and we handle the administration. That way you can be sure that you will get the most from your ISA allowances.

Capital gains tax calculations

One overlooked aspect of making payments into your ISA from taxable accounts is the fact that sales from your investments can trigger capital gains. We first establish whether you have any other gains for the tax year (either from your investments, or perhaps from property sales). We then estimate how much capital gains tax may be payable if you make the recommended sales. If the sales would not generate capital gains above your annual allowance we usually make sales in the previous tax year (March). That way you retain your full annual capital gains allowance for the following tax year, which maximises your opportunity to save tax later.

This means that many of our clients maximise their tax savings by making sales in one tax year, but investments into their ISAs for the following tax year.

What should you do next?

Make sure you use up your ISA allowance as soon as possible, and as early in the new tax year as you can. If you would like to discuss ISAs further, please contact us.

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