Have you heard of ‘ISA season’? Every March, just before the end of the tax year, we read in the financial press about how you should ‘use your ISA allowance, or lose it’. This article explains the flaw in the logic of ISA season, and how our clients do not wait until the end of the tax year to use their ISA allowance, and save tax. For our clients, ISA season is in April. We show an example of how you could save £3,143 in tax by moving your ISA contribution to the earliest point in the tax year.

Key points:

• ISA season video
• When is ISA season?
• When is the real ISA season?
• A typical investment scenario
• How we organise ISA season for our clients

What is ISA season?

Every year, savvy financial commentators tell us that we have an annual ISA allowance. This allows you to shelter £20,000 per person, per tax year, away from all tax. It is a valuable allowance, and could save you an amazing amount of tax over time. ISA season crops up each March, towards the end of the current tax year (which ends on 5th April each year). The marketing tells you to use your ISA allowance, or lose it. This is all valid (and no doubt creates a sense of urgency).

When is the real ISA season?

Of course you should use your ISA allowance if you have the funds available. However, the most effective use of your ISA allowance is to use it as soon as possible, at the start of the tax year. The real ISA season is at the start of the tax year, not the end of the tax year.

If you think about it, by waiting until the end of the tax year to save money into your ISA, you spend a whole year paying tax on your savings. You can avoid this earlier by getting organised.

A typical investment scenario

Set out below is a simple diagram of how an investment account might look for many people. You may hold an investment account with a combination of:

• A taxable general investment account
  This account is subject to tax on income from interest, and dividends, plus capital gains tax on investment sales and capital withdrawals; and
• A tax-free ISA
  This account is free of income tax and capital gains tax.

Of course, you could swap this diagram for taxable bank accounts and tax-free cash ISAs. The principle is the same, although you are likely to pay less tax within your bank accounts, simply because they pay much less income (and no capital growth).

How we organise ISA season for our clients

If you want to shelter the maximum amount of money from tax, you need to use your ISA allowance as soon as possible. This means using your allowance after 6th April, and not waiting until the following March. This is especially true if you have money in a taxable investment account or bank account. It makes sense to move this money into an ISA as soon as possible in April, up to the limit.

As you can see, by moving money from your taxable investment account to the tax-free ISA in April, you potentially gain a whole extra year of tax-free income and capital growth. As we explore below, this can add up to significant tax savings over time.

How ISA season works with our Prosper service

Our Prosper service is designed to allow you to have control over your financial future. We help you to plan the future direction of your finances, and to manage your investments in a sensible way. We also help you to save tax by making the process as easy as possible. ISA season is one example of this, as we set out below.

We handle all the calculations and transactions for clients, to make the process as easy as possible. Every March we contact you to deal with the following issues:

1. ISA allowance remaining for the current tax year
   Most clients use up their ISA allowance as early as possible (in April) during the tax year. However, if you did have funds available at that time, you can top up any remaining ISA allowance. In addition, if you took withdrawals from your ISA during the tax year, you can replace these before the end of March.
2. Capital gains tax calculations
   If you have any taxable investment funds, it makes sense to use this money to pay into your ISA. However, any sales from your taxable investment account could lead to capital gains tax. Therefore, we handle these calculations to be sure that you do not pay more tax than you need to. If there is no tax to pay, you should use your taxable investments to top up your ISAs. If there is tax to pay, you can instead make a cash payment into your ISAs.
3. ISA allowance for the next tax year
   Of course, you should aim to use your ISA allowance in April, so if you have taxable investments available, you need to get ready for this contribution in March. We perform a further capital gains tax calculation on your taxable investment account with the aim of making sales from this account in March. This uses your available capital gains tax annual allowance in the current tax year, leaving a full annual allowance for the next tax year. We can then transfer funds to your ISAs in April, with maximum tax efficiency.

How much tax could you save?

In another article, we explored how much tax you can save by maximising your ISA allowance over time, especially between a married couple.

We have run similar calculations to compare the tax saved with a £200,000 investment over a 10-year period, simply by moving ISA season from March to the previous April, thus using your ISA allowance a whole year sooner.

Note: this calculation only shows the benefit of moving the ISA contribution forward. It does not include the expected capital growth over the period, nor does it include the tax saved by using an ISA over a taxable investment account.

If we were to add in the tax savings of the ISA over the taxable general investment account as well as the benefit of using the ISA allowance as soon as possible, the same scenario would generate tax savings of £36,174 for the 40% tax payer, or £25,671 for the 20% tax payer.

What next?

Clearly, you should use your ISA allowance as soon as possible in April. Consider making sales from taxable investment account in the previous March, if you have your capital gains tax annual allowance available.

If all this sounds a bit too much hassle, our Prosper service is designed to handle it all for you. Contact us to find out more.

Assumptions

• £200,000 investment into a single-person general investment account
• Transfer £20,000 into an ISA every April, rather than the following March
• Capital growth rate 4%
• Dividend rate 1.5%
• Interest rate 1.5%
• ISA allowance growth 3% per year
• CGT allowance growth rate 3% per year
• All taxable investment annual sales to fund ISAs fall within the annual allowance for capital gains tax
• No capital gains tax allowances used at other times
• Capital gains tax paid at 20%
• No other taxable savings or investments are made

These calculations are made for general comparisons only, and should not be relied on for tax advice or financial advice. Each situation is different, and you should seek professional advice before making any changes to your investments.