ISAs regain their investment appeal

Post by Mearns & Company in News

Individual Savings Accounts (ISAs) are attracting greater attention from investors.

Next April ISAs will reach their 25th anniversary. Over the years their appeal has waxed and waned due to a variety of factors, most significantly the changing tax environment and potential investment returns.

In 2023, ISAs may once again rise in popularity:

• Prolonged freezes to the higher rate tax threshold and personal allowance, reductions to both the dividend allowance and capital gains tax annual exempt amount, and a lower threshold for additional rate tax have all made the UK tax shelter offered by ISAs more attractive.
• Improved stock market conditions and higher yields from fixed interest securities (bonds) are likely to encourage investors to reconsider stocks and shares ISAs.

As the ISA’s investor appeal has grown, the government has, at best, demonstrated benign neglect. The main ISA contribution limit has been unchanged at £20,000 per tax year since April 2017. It also remains a contribution limit that has no scope for carry forward, unlike the rules for pension contributions: if you do not contribute to an ISA in a tax year, you cannot double up in the following year.

The government’s disinterest in ISAs is driven by tax – in 2022/23 ISA tax advantages (income and capital gains tax) are estimated to have cost £4.3 billion, and the figure will increase substantially for the current tax year because of those higher returns.

If you have existing ISAs, it is important that you review them regularly to maximise the tax benefits and ensure continued suitability of your holdings. If you have cash ISAs, that review includes considering whether switching to a stocks and shares ISA would be appropriate. Even at today’s higher interest rates (not always passed on to cash ISA savers), the returns are well below the current inflation rate.

With stocks and shares ISAs, the underlying investment funds are the key consideration. Here, advice is important, not only in fund selection but also in balancing the holdings with other investments owned directly or within your pension.

Investments do not offer the same level of capital security as deposit accounts. The value of your investment, and the income from it, can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investing in shares should be regarded as a long-term investment and should fit with your overall attitude to risk and financial circumstances.

The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change.