The rules for individual savings accounts (ISAs) will be changing on the 6th April 2024, mostly for the better.
ISAs are a popular, readily available saving tools and the concept of their tax-advantageous status is well known. Currently, there are five types of ISA:
- Cash ISA
- Stocks and shares ISA
- Innovative Finance ISA
- Lifetime ISA
- Junior ISA
Help to Buy ISAs also exist but can no longer be opened, albeit contributions can be made to existing accounts until November 2029.
So, what do the new ISA changes look like and how might they impact you?
Benefits to ISA changes
Some of the beneficial administrative changes the Chancellor made in his 2023 Autumn Statement will take effect this April. They are as follows:
- From 6th April 2024 it will be possible to make multiple subscriptions to the same type of ISA in one tax year. The current rule is one ISA of each type, each tax year.
- Partial transfers of current tax year ISAs can be made. Currently the entire subscription must be transferred.
- If you hold an existing ISA that received no contribution in the previous tax year, a fresh ISA application is no longer required.
- There will be an expansion to the range of investments for the Innovative Finance ISA.
- There will also be discussions with ISA managers about allowing fractional shares within ISAs. This could allow investors who were previously unable to afford certain shares to purchase them.
Perhaps the most significant ISA incentive is that from 6th April 2024 both the Dividend Allowance and the Capital Gains Tax (CGT) annual exemption will halve (to £500 and £3,000 respectively). As a result, you may need to consider the implications of these reduced allowances as it may mean you end up paying more tax next year than you did previously.
ISAs remain free of UK Income Tax and CGT, which makes them extremely efficient vehicles for accumulating and growing long-term wealth. Capital Gains Tax rates are currently 10% or 20% depending on your other taxable income, which can result in a considerable deduction when sold.
Drawbacks to ISA changes
One of the main drawbacks to these ISA changes is that 16 and 17-year-olds will no longer be allowed to invest up to £20,000 in a Cash ISA, as well as being eligible for a £9,000 Junior ISA. This ISA “loophole” allowed those individuals to place a total of £58,000 into this tax wrapper over a 2 year period, as opposed to the standard £40,000 that would be available to a normal adult.
For those falling under the 18 year age bracket, you still have time to open an adult cash ISA before April 2024, after which you will be limited to the lower JISA allowance of £9,000. Ultimately, younger individuals who do not make the April cut off will see maximum contributions into their ISAs fall £40,000 lower than their elder counterparts.
ISAs and tax year-end planning
ISAs have always been valuable for those who can regularly invest the full annual allowance and consequently build up substantial tax-free savings. Knowing the CGT annual exempt amount and the Dividend Allowance are being halved next tax year, they are becoming more attractive to those wishing to set aside smaller regular or ad-hoc sums.
To make the most of the greater flexibility introduced from 6th April 2024, and get a head start before tax year-end, speak to our team of financial planners today.