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Will you make the most of your new ISA allowance?

Will you make the most of your new ISA allowance?

Category: ISAs

Updated: 11/04/2016
First Published: 07/04/2016

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

The start of a new tax year means only one thing – you've got a brand new ISA allowance
to use! As of yesterday (6 April), you've got an ISA allowance of £15,240 that can be split between a cash ISA, a stocks & shares version, the new innovative finance ISA or a combination of the three, and if you don't use it, you lose it! The question is, will you make the most of it?

Find the best home for your allowance

The first thing you need to do is decide where to put your ISA allowance for the current tax year. Remember that you can only open one cash ISA and one stocks & shares version each tax year, but you can have as many previous pots as you wish (you may also like to transfer your old ISAs into a brand new account, perhaps to secure a better rate or to keep things simple by having everything in one place – find out more about ISA transfers by reading our guide).

  • A cash ISA. A cash ISA will probably be the first port of call for the majority of savers. They provide tax-free interest without putting your capital at risk, so you'll never end up with less than you put in (the same can't be said for stocks & shares ISAs – see below), and there are plenty of accounts to choose from to suit savers of all kinds. Average rates may have been falling recently, but don't let that put you off – you can still find some fantastic deals (such as those from Al Rayan Bank and Aldermore, which pay some of the best rates on the market), so it's all about doing a bit of research.
  • A stocks & shares ISA. Stocks & shares ISAs aren't for everyone – they come with a higher level of risk than their cash-based counterparts – but for those with a higher risk appetite, they could be ideal. Read our guide to find out more about them to see if this form of investing could be for you.
  • An innovative finance ISA.The innovative finance ISA is a new concept for this tax year, and it basically allows those who wish to invest up to £15,240 through peer-to-peer lending platforms to receive their interest tax-free. Again, this won't be for everyone, as although there are safeguards in place, there's still the chance that you could lose your money.

The importance of starting early

No matter what kind of ISA you're considering, the key to really making the most of your allowance is to start saving as early as possible. That way, you'll be able to benefit from compound interest throughout the year, and could see your pot grow quicker.

This is particularly the case when it comes to stocks & shares ISAs, as research from Fidelity International highlights. In fact, their calculations show that early bird ISA investors can be more than £8,000 better off than those who leave it until the end of the tax year to make their investments: the figures show that an investor who invested a lump sum at the start of the tax year every year since 2005/6 would now have a portfolio that's worth £144,580, or £8,316 more than someone who invested a lump sum at the last minute.

You don't have to invest the full amount in one go – unless you've got the available money to do so and wish to invest in a fixed rate ISA – but can instead regularly add to your pot throughout the year, with variable rate cash ISAs and most stocks & shares versions allowing further additions (Fidelity's calculations show that someone who split their ISA investments equally each month would still be over £6,000 better off than the last-minute investor).

But what about the Personal Savings Allowance?

However, some may be wondering whether it's still important to save in an ISA at all, what with the new personal savings allowance meaning that the first £1,000 a basic rate taxpayer earns in interest is entirely tax-free.

But that certainly doesn't mean you should overlook ISAs. The new allowance is a great move for savers, particularly given that rates are so low (at the moment you'll need a hefty savings balance before you start paying interest), but what about when rates rise? There's also no guarantee of how long the personal savings allowance will last – interest earned from ISAs, on the other hand, will be tax-free for life – and factors like the ability to pass on ISAs as inheritance mean they're still valuable.

Combine that with the fact that relatively few people know what the personal savings allowance actually is – research from Virgin Money has found that only 19% of people understand the new regime – and the need to continue with your ISA investments becomes even more pressing.

"We welcome initiatives that aim to bolster the nation's savings habits," said Zack Hocking, director of Savings at Virgin Money, "but our latest research shows just 19% of people currently understand what the Personal Savings Allowance is, so we all need to do more to help people understand how best they can benefit from new tax efficiencies.

"While the PSA allowance is a good thing, when interest rates eventually rise the £1,000 limit will be reached with a smaller pot of savings and your allowance will shrink as your income grows. For many, putting money into a cash ISA will still offer a great way to kick-start a regular savings habit that ensures interest earned will be protected from tax in the years ahead."

Virgin Money's research also showed that only 27% of people are happy with the rate of interest they're currently earning, while 17% admitted their money is earning no interest at all - so why put up with it? "The start of the new tax year is the perfect time to start putting that right, by getting to grips with the new rules and making sure you're making full use of tax efficient savings options," added Zack, and we couldn't agree more. Start the process by checking out our ISA best buys and see if you can make the most of your allowance.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.