Monday 8 February 2021 9:00 am

How to use ISAs to simplify your life

Hannah Smith is an award-winning freelance financial journalist specialising in personal finance and investing. www.hannahsmithjournalist.co.uk

ISAs are an incredibly useful savings and investment tool which should form the bedrock of your financial planning strategy. They can even help you simplify and streamline your personal finances for an easier life. Here’s how.  

Spend less time on your tax return

If you complete a self-assessment tax return, any interest, capital growth or dividends your savings and investments have generated don’t need to be declared on your form, as long as they are held within an ISA. That’s less paperwork for you and your accountant, and no tax to pay on your ISA savings. 

More freedom to earn

Using ISAs can give you freedom to earn more, says Scott Gallacher, director at Rowley Turton Private Wealth Management. For example, imagine Fred earns £45,000 a year, and gets £5,000 a year in dividends from shares he owns. If he held those shares in a general investment account, he would pay £225 in income tax on his dividends (his dividend allowance would give him £2,000 tax free and the rest would be taxed at 7.5%). Fred has two children for whom he claims child benefit. If he earned a £5,000 bonus at work, this combined with his salary and dividend income would tip him over the threshold for the higher income child benefit charge. But, if he held his shares in an ISA, he would stay under the threshold and it wouldn’t affect his child benefit claim, Gallacher explains.

Consolidate your savings pots

You might have a few old ISAs scattered about that you’ve lost track of, so why not simplify things by consolidating them all in to one pot? Zoe Bailey, director of financial planning at Tilney, says “it’s a peace of mind exercise” which helps you see what you need to do to build your medium- to long-term savings. “You can transfer a historic ISA into a new ISA and that doesn’t use this year’s allowance,” she explains. But it’s really important that people do an official ISA transfer via their provider and don’t just withdraw the cash from ISAs to their bank account and then move it themselves – if you do this you lose the tax-free benefits and the money counts towards your ISA allowance for this tax year. 

Move your money flexibly

Not everyone is aware that most ISAs now are ‘flexible ISAs’, which means you can withdraw money from them and put it back in in the same tax year without losing any ISA allowance. “A recent nice feature of cash ISAs is the flexibility to withdraw and put back in without it affecting your allowance,” says Emma Watson, head of financial planning at Rathbones. This means, if interest rates improve and people would rather move to cash, they can transfer their investments between stocks and shares and cash ISAs

That flexibility is also useful if you’ve made a mistake with transferring into an ISA, or you need to access your cash temporarily as money is tight but you know you’ve got a bonus coming, for example, adds Bailey.

Beat Budget tax hikes

With the government looking to offset its pandemic spending, the Chancellor may raise capital gains tax (CGT) in the March Budget. If you’ve got any investments in a general investment account, now is the time to look at moving them into the tax shelter of an ISA. You can use something called a ‘bed and ISA’ to do this – it’s where you sell any investments held outside an ISA and move them into an ISA (either in cash or you can buy the same investments again) in a single transaction, to reduce the time you are out of the market. This tax year, your CGT allowance means you won’t pay tax on up to £12,300 of capital gains you’ve made from your investments.

Use ISAs for retirement income

With an allowance of £20,000 a year, if you’ve got enough spare cash to put aside, you can build up a substantial amount in ISAs by retirement age. At this point, you can draw a tax-free income from ISAs. “It’s really tax efficient, you can be clever and use your pension tax-free lump sum, ISA income and pension income to receive an income above a basic-rate taxpayer amount, but pay basic-rate tax,” says Bailey. And, unlike pensions, money in your ISA is not locked away until you reach 55 or 60, so there’s extra flexibility there in case you wanted to withdraw a lump sum to pay off your mortgage, for example.

Use ISAs to teach your kids about money

The Junior ISA allowance more than doubled to £9,000 this tax year, showing that “the government is thinking about ISAs as being a real key building block for family finances”, says Watson. Not only can they give your child a financial security blanket, but you can use ISAs to teach them financial literacy. “Stocks and shares Junior ISAs have a lovely feature which is that your children can get control over them at age 16 but they can’t access them until age 18,” she says. “So you have a two-year window to teach your children everything you know about investments and risk and responsibility before they could potentially whip the lot out and spend it in the student bar.”

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