As the end of the financial year draws ever closer, it’s important not to forget about any ISAs (Individual Savings Accounts) you have and any remaining payments that you’re allowed to make. The maximum allowance for ISAs for the 2015/16 financial year is £15,240, so it’s important that you invest any funds that you have left to pay into your ISA as close to that amount as possible, as soon as you can.
The amount will reset again on 6th April 2016 whether you have paid in the maximum amount or not – it cannot be carried over to the next year – so make sure you take advantage of your full allowance whilst you can.
The main draw of investing your money into an ISA is, of course, that any money you pay in is exempt from taxation on withdrawal, allowing you to potentially build up interest on invested funds much more readily than in other forms of savings or investments. It’s typically considered a good idea, therefore, to take full advantage of any ISAs you have before 5th April this year, if you are in a position to do so, or you will be missing out on the tax-free savings you’re entitled to.
Special Mention; The Personal Savings Allowance
This next tax year also brings with it the introduction of the Personal Savings Allowance (PSA). The personal savings allowance in 2016/17 will be £1,000 if you are a basic rate taxpayer and £500 if you are a higher rate taxpayer. If you pay tax at 45%, then you will not receive any allowance.
From 6 April 2016 banks and building societies will start paying interest without deduction of tax, thereby saving HMRC a flood of small tax reclaims. National Savings & Investments will do the same, although it does already pay interest gross on some of its products. However, at least for the time being, unit trusts and OEICs that make interest distributions (e.g. corporate bond funds) will still have to withhold basic rate tax.
This together with the dividend allowance (as explained in our other article) means that as part of your year-end planning you should review your investments to consider who holds what and how they are held. These allowances create some interesting new planning opportunities, not all of which are immediately obvious. For example, with the right mix of dividends and other income in 2016/17 it will be possible to receive an income of £22,000 a year without paying a penny in tax.
Your ISA allowance is separate to the Personal Savings Allowance and you can take advantage of that on top of the new PSA. Particularly for higher rate tax payers, who get a lower allowance, and for additional tax payers who are unaffected by the change, ISAs will remain a key player in the savings game.