5 reasons why you should aim to use your ISA allowance while you can

The ISA allowance works on a use-it-or-lose-it basis. Here are five reasons why you should consider using your ISA allowance before the 5 April deadline.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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We are currently in a very busy period for UK financial providers. To encourage people to invest, financial institutions will offer a variety of promotions and discounts in the run-up of the end of tax year on 5 April. If you already invest, with the ISA allowance set to reset, you’re presented with an opportunity to evaluate your short- and medium-term plans. 

Here, I take a look at five reasons why you should consider using your ISA allowance before you lose it forever.

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1. Tax relief 

The best thing about investing through an ISA has to be that you get a tax break. To put it simply, for as long as your money is in your ISA, you won’t pay any income or capital gains tax on your returns. In addition, if your investment portfolio includes some dividend-yielding stocks, then you are also exempt from paying dividend tax. It therefore makes sense to make the most of your ISA allowance each year.  

2. Minimal amount need to open an account

The ISA allowance clearly states the maximum amount that you can deposit in your ISAs each year. For the 2021-22 tax year, the ISA allowance is £20,000. This could of course change in the future according to new government regulations. However, most providers allow you to open an account with as little as £1 and deposit as many times as you want through the financial year. 

3. Maximising your returns

The tax relief available is something you shouldn’t underestimate. If you can afford to use your full ISA allowance each year, over a long period of time, you could potentially grow your pot to be worth hundreds of thousands of pounds.

Achieving ISA millionaire status could be within reach if you consistently use your full ISA allowance and you set yourself a long-term goal. However, you should note that investing in the market increases your risk and you could end up with less than you put in. 

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4. Flexible withdrawals 

Some ISA providers are becoming more flexible in terms of their withdrawal policies. However, don’t take this for granted as these rules are not universal.

But how does this work in practice? Let’s say you’ve opened a flexible cash ISA in the current financial year and you have deposited £5,000 so far. If you need to withdraw £500, you can then deposit back the £500 in the same financial year without this affecting your ISA allowance – as long as you have a flexible ISA. 

5. ISA transfers

Transferring an ISA is possible, but it is always important to follow the ISA transfer rules. There are several reasons why you could potentially consider initiating an ISA transfer, including to:

  • Change providers due to better offerings
  • Consolidate your pots into one account to reduce the fees you are paying
  • Get exposure to the stock market

Alongside the rules, make sure you check the providers and the charges, penalties or benefits that you might lose as a result of the swap. 

Takeaway

When using your ISA allowance, it’s wise to keep your sight of the investing basics. Whether you decide to invest or simply to save, think long term. Even in uncertain times, a long-term investment strategy remains valid and sticking to your plan will increase your chances to reach your financial goals.

As well as this, don’t put all your eggs in the same basket. Aim to diversify your portfolio across different geographies and assets types, as it is highly unlikely that they will all perform poorly at the same time. This could provide you with a sense of security when the market is volatile. 

Please note that tax treatment will depend on your individual circumstances and may be subject to future change. The content of this article is provided for information purposes only. It is not intended to be, nor does it constitute, any form of tax advice. You are responsible for carrying out your own due diligence and for obtaining professional advice before making any investment decisions. 

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