How can your ISA allowance impact your wealth?

Investing in Individual Savings Accounts (ISAs) can be a great way to grow your wealth towards your financial goals.

However, to do so effectively, it’s important to understand the ISA allowance and how it might impact your wealth.

Read on to learn how the allowance works, what it means for your finances, and how you can make the most of it.

What is an ISA allowance?

An ISA allowance is the maximum amount you can contribute to your ISA tax-free each year.

ISAs allow you to grow your savings in an account, and the main benefit of these investments is that the money you save can be contributed and withdrawn tax-free.

However, your ISA allowance caps the amount you can save. As of the current tax year 2023/2024, the ISA allowance is £20,000.

Unlike pensions, there isn’t usually an option to exceed your ISA allowance and just pay tax on your savings. Most providers only allow you to contribute up to this amount.

Also, your ISA allowance must be shared across all types of ISAs you open each year, of which there are four – cash ISA, stocks and shares ISA, innovative finance ISA, and lifetime ISA.

For example, you can contribute £4,000 to your lifetime ISA and £16,000 to your cash ISA in the same year.

How can the ISA allowance impact your wealth?

The main impact the ISA allowance will have on your wealth is that it simply limits the amount of tax-free savings you can grow each year.

Regardless of how many ISAs you open, and which types they are, you will only be able to contribute up to £20,000, and no more.

Also, your ISA allowance cannot be rolled over to the next tax year, so any amount you don’t use up will not be added to your allowance for the following tax year.

Making the most of your ISA allowance

There are many things you can do to make the most of your ISA allowance so you can build your wealth effectively.

• Use your partner’s allowance

Since ISA allowances apply to individuals, this can be a benefit to investors with a spouse or civil partner.

You can make sure each of your allowances is used up in full each year, which can give you a combined total of £40,000 in tax-free savings.

Also, even if one partner earns more than the other, you can just plan out how much needs to be contributed by each person into each account so the allowances are used up.

• Invest in different ISA types

You can also diversify your investments in each ISA, so you can grow your savings effectively.

Cash ISAs allow you to save money each year, but stocks and shares ISAs, for example, allow you to grow this money with successful investments.

Any growth made from these investments will not be taxed with Capital Gains or income tax, so this can add additional tax-free savings on top of your £20,000.

• Create a financial plan

As with any type of investment, it can be useful to have a financial plan in place.

For one, this can help you set your financial goals, so you have a clearer idea of how much you need to save in your ISAs each year to reach your targets.

Also, this can help you make sure all your ISA investments are aligned with your current circumstance, so you can use up as much of your allowance without compromising your wealth resilience.

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Now you know how your ISA allowance can be used for your finances, speak to your wealth manager to begin planning your own approach to ISA investments.

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Please note, the value of your investments can go down as well as up.