Individual savings accounts (ISAs) are a flexible and tax-efficient way to either save or invest your money, but what happens when you’ve used up your annual allowance in full?
Unlike traditional saving or investing accounts, ISAs provide a tax-free wrapper, which means that any profit you make isn’t subject to income tax or capital gains tax (CGT). Stocks and Shares ISAs are even exempt from dividend tax.
Because of their helpful tax benefits, the contributions you can make to Cash ISAs, Stocks and Shares ISAs and Innovative Finance ISAs are capped at £20,000 each tax year. However, starting in April 2027, the annual allowance for Cash ISAs will fall to £12,000 for anyone under 65 years old.
Due to your total allowance being limited to £20,000 per year, some savers and investors may find themselves a little stuck when it comes to working out what to do with their money once they’ve hit their cap.
Fortunately, if you’ve found that your ISA has been fully funded already this tax year, you have plenty of options at your disposal:
Bed and ISA
If you want to make sure your money goes into an ISA despite already reaching your allowance within the tax year, one popular option is to ‘bed and ISA’, which involves keeping your money in a separate investment account before switching your funds into an individual savings account when the new tax year arrives on the 6th of April and your £20,000 cap resets.
The best way to bed and ISA is to keep your money in a General Investment Account (GIA) in the short term. This allows you to invest in all of the stocks and shares that can be included in your ISA before simply selling your assets and rebuying them within your tax-free wrapper.
However, this approach does mean that you’ll be liable to pay tax on your earnings outside of your ISA, so it’s important to switch your investments to an ISA as soon as your allowance resets.
Focus on pension saving
The most tax-efficient way to manage your wealth if you’ve used up your ISA allowance is to focus on pension saving instead.
Unlike the £20,000 annual ISA cap, pension allowances can be up to £60,000 per tax year, depending on your salary. By contributing to your pension, you’ll qualify for tax relief at the marginal rate, which can make a huge difference for your retirement pot later down the line.
The great thing about contributing to your pensions is the carry-forward rule, which means that even if you reach your full allowance this year, you can use up any allowances that haven’t been used over the past three tax years. As a result, pensions are a great way to get more tax efficiency out of lump sum payments.
Using family allowances
If you want to make the most of the tax-free benefits of ISAs beyond the £20,000 allowance, it’s possible to gift the money to your spouse so that they can contribute it to their individual savings account on your behalf.
However, you should keep in mind that money saved in a spouse’s ISA is their property by law, so you should only use this approach if you trust that they’ll act with your best interests in mind.
You may also choose to contribute more money to a Junior ISA, which can be opened on behalf of your child with a £9,000 annual allowance. Junior ISAs (JISAs) work in a similar way to adult accounts, allowing your children to build a nest egg for the future.
However, JISAs cannot be accessed until your child turns 18 years of age. The funds will also legally belong to your child once they become adults. So again, this is more of a strategy that helps to build your household wealth, rather than a means of generating personal wealth.
Making the most of tax efficiency
Your ISA will always be the most tax-effective way of building wealth in the short term, but there are plenty of ways to look after your money and keep it away from the taxman if you’ve used up your £20,000 annual allowance.
By adopting bed and ISA strategies, allocating funds to pensions, or making the most of unused allowances from your partner or children, it’s possible to make your funds stretch further and to really set your family up with all the tools they need for generational wealth.
Individual savings accounts are a great way to make your savings or investments stretch further, and with the right tax planning, you can continue reaching your financial goals even after you’ve maxed out your allowance.
The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any finance decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.
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