If you regularly pay into ISAs, you’ll know that they offer an invaluable way to shield your savings and investments from Income Tax and Capital Gains Tax (CGT).
However, under current rules, you can only pay up to £20,000 into ISAs each tax year (as of 2024/25).
So, if you regularly use your full annual ISA allowance, you might have been interested to hear chancellor, Jeremy Hunt’s Budget announcement that he plans to introduce a new UK ISA.
The “UK” or “British” ISA – which is currently under consultation – is designed to support UK companies while allowing you to benefit from additional tax-efficient savings.
Read on to find out more about what the British ISA could look like and explore some of the key factors you might want to consider before investing.
The British ISA could offer you an additional £5,000 annual ISA allowance
The British ISA is currently in a consultation period that will run until 6 June 2024. So, the details of how this new ISA might work are yet to be clarified.
However, the government has revealed that the British or UK ISA would allow you to invest £5,000 in UK-based assets without incurring tax on income or capital gains.
This new £5,000 allowance would be in addition to the existing £20,000 ISA allowance (2024/25), which you can currently invest in up to four types of adult ISA:
- Stocks and Shares ISA
- Cash ISA
- Innovative Finance ISA
- Lifetime ISA.
So, if the British ISA is introduced, you could potentially invest up to £25,000 in ISAs each tax year.
However, it’s not yet clear what type of investments you might be allowed to add to a British ISA. You could be limited to UK shares, or the qualifying criteria might extend to include UK-focused funds and investment trusts.
The potential benefits of investing in a British ISA
Boost to your ISA subscription limit
You may already adopt a UK-centric approach to investing using the current ISAs available. A Stocks and Shares ISA allows you to choose investment funds and company shares, so you can prioritise UK funds if you wish.
However, the key benefit of the British ISA, were it to be introduced, would be the £5,000 boost to your annual ISA allowance.
Any interest or returns you earn on contributions within your annual subscription are free from Income Tax and CGT, making ISAs a tax-efficient way to save.
Shield more of your wealth from Dividend and Capital Gains Tax
As the Annual Exempt Amount for CGT and the Dividend Allowance have both been reduced for the current tax year, ISAs may be an even more attractive option for savers and investors.
The Annual Exempt Amount for CGT was reduced from £12,300 to £6,000 for the 2023/24 tax year, and to £3,000 from 6 April 2024. Meanwhile, the Dividend Allowance was cut from £2,000 to £1,000 for the 2023/24 tax year, and to £500 for the 2024/25 tax year.
Indeed, interactive investor reported that these changes may have contributed to 2023 being a record year for “Bed and ISA” requests, which allow savers to move assets held outside of a tax wrapper into an ISA.
Reduce your liability for Income Tax
Additionally, as ISAs are protected from Income Tax, using your full annual allowance could help you to maximise your tax-efficient savings.
According to MoneyWeek, the number of people paying tax on their savings increased substantially in the 2023/24 tax year. This may be due in part to higher interest rates, which have resulted in many savers exceeding their Personal Savings Allowance (PSA) for the first time.
The PSA dictates how much you can earn each year from savings before paying tax and it currently stands at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. Additional-rate taxpayers do not have a PSA.
So, the additional £5,000 annual ISA allowance might be an appealing benefit of investing in a British ISA, as it could allow you to save up to £25,000 a year tax-efficiently.
Potential limitations of the British ISA
The existing Stocks and Shares ISA allows you to invest in foreign stocks and shares as long as they are listed on a recognised stock exchange.
In contrast, a British ISA may be restricted to investments in UK funds, which according to IFA Magazine, account for less than 4% of the global stock market.
This limitation could make it harder for you to develop a diversified investment portfolio.
Diversification is one of the fundamental pillars of an investment strategy. Including a variety of asset classes and types of investment, and assets from different parts of the world in your portfolio, could help you balance risk and mitigate losses during periods of market volatility.
However, if you were to invest your £5,000 British ISA allowance into UK funds, and the remaining £20,000 of your annual ISA allowance into overseas investments, 20% of your overall ISA investment would be in the UK stock market. As you read above, considering the UK accounts for around 4% of the global stock market, you may then be overweighted in UK shares.
Consequently, putting this amount of your money into a single geographical market could potentially expose you to a higher level of risk than you might otherwise feel comfortable with – especially as the UK market is relatively small.
Until the government completes its consultation on the British ISA, the pros and cons of investing remain unclear. However, the potential for an additional £5,000 annual ISA allowance might make it worth exploring if it becomes available.
Get in touch
If you’d like to learn more about how to use your annual ISA allowance to boost your tax-efficient savings and investments, we can help.
Please email us at mail@delaunaywealth.com or call 0345 505 3500.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investments (and any income from them) 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.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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