Getting the most out of your ISA and pension allowance

Investing wisely is vital to your future financial security. The right tax planning can ensure your money is working harder and smarter.

Investing your money wisely plays an incredibly important part in your ability to achieve the things in life that matter most to you. By utilising the generous allowances of an ISA or maximising the fantastic tax benefits provided by pension contributions, you can ensure you’re on track to securing your financial goals.

Yet the reality is that many people don’t make the most of the allowances they’re entitled to, which means they’re missing out on valuable tax savings and opportunities to boost their wealth. With tax year-end just around the corner, make sure you understand the allowances you’re entitled to so that you can ensure your investments are working harder and smarter in securing your future.

ISAs

Since their introduction in 1999, ISAs (or Individual Savings Accounts) have become one of the most popular ways to save and invest for the future, providing a simple and flexible way to help achieve financial freedom and peace of mind.

The key attraction of ISAs is that there is no liability to Income Tax or Capital Gains Tax on profits or withdrawals. Sheltering your money from tax can make a big difference to wealth you can create over the longer term. Broadly, there are two types: Cash ISAs and Stocks & Shares ISAs.

Your annual ISA allowance is £20,000 for the current tax year. You can invest it in one type of account, or you can choose to spread it across several different types of ISAs. For example, you could put £6,000 into a Cash ISA and £14,000 into a Stocks & Shares ISA. Previously, it was only possible to subscribe to one ISA of each type in a tax year; but from April 2024 you can make multiple subscriptions to the same-type ISA in the same tax year.

Cash ISAs remain the most popular choice, however, if the returns on your savings aren’t keeping up with inflation, then the spending power of your money is reducing. That’s why it’s important to think long term with your valuable allowance.

If you choose a Stocks & Shares ISA, you can invest in a portfolio of funds, rather than individual shares. This spreads your money far more widely, offering the benefits of diversification and professional management. By investing in assets capable of generating income and capital growth, a Stocks & Shares ISA gives you the chance to make the most of the long-term tax benefits of your annual ISA allowance.

Investors who are 18 or over but under 40 also have the option of saving into a Lifetime ISA, which works slightly differently. You still benefit from no Income Tax or Capital Gains Tax on your profits, but the government also offers a bonus of 25% of the money you pay in. Consequently, the annual allowance is much lower at £4,000 each tax year, which counts towards your annual ISA limit of £20,000. You can invest money into a Lifetime ISA until you’re 50, and the proceeds must be used to buy your first home or to save for later life.

In the 2024 Spring Budget, the government announced plans for a new British ISA, which would increase the annual allowance by £5,000 where the additional investment was made solely into UK assets. However, further details, including the launch date, have not yet been confirmed.

Your ISA allowance is a use-it-or-lose it opportunity. If you don’t use it before the end of the tax year, it’s gone for good. This means you could be losing out on valuable tax-saving opportunities that can help your money to go further towards your future.

Please note that St. James’s Place does not offer a Lifetime ISA.

Pensions

You can pay as much or as little as you wish into your pension. However, you will only receive tax relief on contributions up to a maximum of £60,000 each tax year. If you’re a high earner the allowance may be less, depending on how much you earn.

With all personal pension contributions, you get an automatic top-up for basic rate tax relief of 20%. That money is paid directly into your plan by your pension provider. So, if you’re a basic rate taxpayer and have £4,000 to invest in your pension as a lump sum, you’ll get £1,000 in tax relief on day one. That’s a very quick boost on your initial contribution. If you’re a higher or additional rate taxpayer, you can claim the additional 20% or 25% of tax relief through your self-assessment tax return.

This extra tax relief is paid to you as a cash sum upon completion of your tax return. So, by paying more into a pension, you will pay less tax, meaning you will have even more to put towards your retirement.

If you have fully used your annual pension allowance, you may be able to carry over any annual allowances that you didn’t use from the previous three tax years. You can find out more about this on the gov.uk website.

The total amount you can build up in all your pension savings and on which you can still receive tax relief was limited by the pensions lifetime allowance (LTA). For most people, this was £1,073,100. Those taking benefits exceeding the LTA faced a tax charge of 55% on lump sum withdrawals and 25% if taken as a taxable income.

However, this charge was removed from April 2023 and the LTA abolished from April 2024.

Always try remember, the longer your money is invested, the more potential it has to grow – thanks to the power of compounding. Whilst the idea behind a pension is simple, sometimes making the right choices can be incredibly complicated.

Whether you have a question about ISAs or your pension allowances, or you would simply like advice about how best to save for your future get in touch with our expert advisers today.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

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