ISA season is the period just before the end of each tax year when time is running out to use up tax-free allowances.
Each year, much is made of the final few weeks before the deadline, which this year is 5 April. But how do the various benefits stack up in the current high-inflation climate, and which allowances are most effective?
Allowances
ISA allowances have changed in the past, but in the last few years they have been set at one level both for normal cash and for stocks and shares ISAs.
Unlike other types of account such as the Lifetime ISA (discussed below), the limit is pretty generous, relative to the average working income.
Anyone looking to save into one of these accounts has an annual allowance of £20,000. Prior to this, the limit was £11,800 before it rose to £15,000 in July 2014. It was then boosted to the £20,000 level three years later.
This means that the level hasn’t changed since 2017, which some critics describe as a form of stealth tax. As with income tax rates, if the bands don’t rise with inflation, then effectively the Government is benefitting at the top end from any money an individual can’t put into the allowance.
And with inflation currently above 5%, this effect will be stronger now than at any time under the current allowance.
Achievable?
That being said, the major criticism levelled at ‘ISA season’ is that actually, although the allowance hasn’t moved for a few years, realistically it isn’t relevant because most people won’t be able to fill it each year anyway.
Were you to meet your allowance each year by making monthly contributions, you’d have to put away around £1,667 a month. This is indeed unlikely to be met by most people, when average wages are still around £31,000 a year before tax, according to the Office for National Statistics.
Nevertheless, it remains relevant for anyone dealing with larger sums, which may occur through work bonuses, inheritances, or other such windfalls.
Rates
There is also evidence that cash ISA rates do increase in the run up to the end of the tax year, according to Moneyfacts.
This means that if you’re looking to take advantage of a cash account then it could be the best time to start shopping around.
Even so, cash ISA rates are extremely low at the moment – much below levels of inflation. This means that generally speaking, unless you’re looking to put money in an easy-access account for rainy-day reserves, then it is generally better off invested for the long term in stocks, bonds and other investments.
Lifetime ISA
There is, however, one account where ISA season really does matter. That is in the Lifetime ISA (LISA).
Unlike typical ISAs, the LISA has a limit of just £4,000 per year for you to contribute. Anyone between the ages of 18 and 39 can open one and it comes with an extremely generous 25% bonus from the Government.
This means that if you put the maximum of £4,000 in, you’ll get a bonus of £1,000. That is on top of any interest you accrue through a cash LISA or a stocks and shares LISA.
There is an important caveat with the LISA, though: you have to use the money for a deposit on a house, strictly as a first-time buyer; otherwise, the money must stay in the account until you turn 60 – on pain of a hefty withdrawal penalty, similar to a pension.
If you’re considering which accounts might be best, or whether you should try to top up your ISAs before the end of the tax year, don’t hesitate to get in touch with your financial adviser.