More Britons are using ISAs to grow their wealth and build a nest egg in a tax-efficient way, but what happens if we hit our £20,000 tax-free allowance limit?
With 22.3 million adult ISA holders in the UK, it’s clear that we’re a nation that’s in love with keeping the taxman away from our hard-earned wealth.
The reason ISAs, or Individual Savings Accounts, are so popular is because they offer a £20,000 annual tax-free allowance every tax year.
This means that between the 6th April and 5th April every year, we’re free to save up to £20,000 in our accounts with no capital gains tax (CGT) obligations that can eat into the profits we make.
Our ISA allowance is capped at £20,000 for both Cash ISAs and Stocks and Shares ISAs. However, for Lifetime ISAs, the cap is reduced to £4,000, and for Junior ISAs (JISAs) the annual limit stands at £9,000.
Crucially, this £20,000 allowance refers to the total amount that you can save tax-free across your ISAs. While there’s no limit to the ISAs you open, you would have to split your allowance across your accounts.
For instance, you could save £13,000 in your Cash ISA, and the remaining £7,000 in your Stocks and Shares ISA. But you couldn’t save £13,000 for both your Cash and Stocks and Shares Individual Savings Accounts.
So, what happens if you reach your annual allowance limit? Don’t worry, there are plenty of options on hand:
Utilise Your Pension’s Tax Efficiency
The first, and most popular, choice to continue maximising your tax efficiency after you reach your ISA threshold is to focus on the tax-free allowances offered by your pension.
Pensions carry an annual limit that you can pay into your pot each year before you’re liable to pay income tax. For the tax year 2024/25, this limit is £60,000.
With a far higher cushion, pensions are a great overflow option to help maintain your ability to build your wealth without the taxman eating into your earnings.
However, it’s important to note that your annual tax-free allowance is tapered for higher earners, and is reduced by £1 for every £2 you earn over £260,000 per year. The tapering process stops when the allowance falls to £10,000.
While pensions are a great way to access tax relief, it’s important to note that your pension pot will be inaccessible until you turn 55, with the pension age soon rising to 57 in 2028. For many savers, this could be a long time to wait in order to access your savings, so it’s worth considering whether a pension is well aligned with your wider financial goals.
Use Your Partner’s ISA Allowance
ISA allowances aren’t limited to households, and if your spouse or partner has space in their annual tax-free allowance, you’re free to top up their accounts.
This strategy can potentially double your ISA allowance to £40,000 per year depending on your interest in investing. However, it’s certainly worth agreeing on how you plan to use your investments in their savings account to avoid any crossed wires further down the line.
Using your partner’s ISA allowance can be a great strategy if you’re saving for shared financial goals or one-off purchases in the future like a house, family car, or a child’s university tuition.
It’s also entirely possible to set your child up with a Junior ISA (JISA) and max out their tax-free allowances if you’re looking for efficient ways to continue saving. While Junior ISAs have a lower allowance of £9,000 per year, they can be a great way to invest in your child’s future without having to pay tax on your profits.
However, it’s important to keep in mind that your child will be unable to access their JISA savings until they turn 18.
Switch to a GIA
If you’re happy with your Stocks and Shares ISA portfolio and believe that the upside is still worth it regardless of any tax implications, it’s entirely possible to open a General Investment Account (GIA) which can replicate your portfolio and carries no upper limits on the amount of money you can invest each year.
Just keep in mind that you don’t have the same tax protections on a GIA compared to your usual ISA, so will be liable for taxation. Though with the current £3,000 annual exempt amount in place, you will only pay capital gains tax (CGT) on earnings beyond this mark when saving with an ISA.
Looking After Your Wealth
If you’re concerned about exceeding your £20,000 ISA limit, don’t worry, there are plenty of alternative options available that provide some level of tax protection. Your options will depend heavily on your financial circumstances and goals.
Whether you decide to share your wealth by using your spouse’s ISA allowance or prioritise your pension, it’s possible to keep your earnings safe. These considerations mean you can boost your savings beyond the £20,000 annual limit and keep your wealth away from the prying eye of the taxman each year.
