ISAs have become one of the UK’s favourite ways to save money, but what can you do if you’ve maxed out your annual tax-free allowance?
The beauty of Individual Savings Accounts (ISAs) is that they allow you to save money on a tax efficient basis to help grow your wealth and build a nest egg for the future.
Whether you’re interested in building a Cash ISA that’s based on a fixed or variable rate of returns or floating your savings on the stock market in a Stocks and Shares ISA, everybody who opts for these types of savings account can enjoy an annual £20,000 tax free allowance.
In practice, this means that every tax year, from April 6th to April 5th one year on, you can save up to £20,000 and be liable to pay no capital gains tax (CGT) on any earnings you make.
Filling your tax-free allowance is a great way to protect your earnings when those pesky end of year taxes come around, but what happens if you’ve already reached your £20,000 limit and still have money left over to save? Don’t worry, here are five alternative options for you to consider:
1. Switch to a GIA
Many of us will enjoy having an ISA and pension that are invested in a diversified portfolio that’s aligned with our wider financial goals.
If this is the case, you may not want to pursue alternative investment options and can instead continue to use the same portfolio to invest into. Although you’ll still be saving money in the same way, it will fall outside of the ISA and pension tax wrapper, and is known as a general investment account (GIA).
Simply put, a GIA refers to a collection of funds or shares that are not inside a tax wrapper like an ISA or pension. Sadly, this means that you won’t qualify for a tax-free status on your earnings in this account, but it’s a great option if you’ve carefully selected a stocks and shares ISA that you believe in and want to maximise your earnings.
Although you may be put off by the prospect of losing your tax efficiency, it’s worth remembering that you can use your savings allowance (which is £500 or £1,000 depending on your tax rate) against the interest you earn and a dividend allowance (£2,000) to cover earnings from your dividends.
You will also have a capital gains tax allowance of £12,300 to help protect your earnings from the taxman, meaning that you’ll still enjoy some tax efficiency even if you max out your £20,000 ISA allowance.
2. Focus on Your Pension
One of the primary reasons why ISAs are preferred to pensions by some investors is because they’re more accessible. To make a withdrawal from your pension, you’ll need to be 55 years of age, and this figure is rising to 57 by 2028, making it a long wait to access your savings.
Despite this, pensions can be a great way to maximise your tax efficiency beyond your ISA’s allowance, and given that your annual allowances for pension savings range to £60,000, you can build a comprehensive retirement pot for the future.
However, it’s important to note that if your adjusted income exceeds £260,000, your annual allowance tapers by £1 for every £2 above the threshold your income reaches.
3. Pay Off Your Mortgage
If you have a mortgage, choosing to pay it off once you’ve maxed out your ISA allowance is a great way of managing your debt while continuing to grow your savings.
Mortgages are likely to be the largest debt you’ll ever have, and paying it off whenever you get the chance is a great way to protect your wealth against losing out to interest rates long into the future.
The great thing about mortgages against investing is that you can often quantify your strategy based on interest rates. If your ISA returns are stronger than the mortgage rates you’re paying, it may be worth continuing to invest your money. If, however, your mortgage rate is higher than your savings account yields, it’s worth prioritising the paying of your mortgage instead.
4. Save Into Your Partner’s or Child’s ISA
If you have a spouse, you can save into their ISA to make the most of their tax-free allowance, too. Additionally, if you have a child, you can open a Junior ISA and save on their behalf.
Because everybody in your household is entitled to their own £20,000 annual ISA allowance, there’s no reason why you shouldn’t double your total allowance by using both accounts and their tax efficiency.
However, it’s worth agreeing on your savings strategy with your partner first to avoid any disagreements over ownership in the future.
You’re also able to save up to £9,000 per year tax-free in a Junior ISA (JISA), which can be opened for your child from birth. However, the money within a JISA can’t be touched until your child turns 18.
5. Buy Into Bonds
If you’re looking to build your revenue streams, bonds can be a great alternative if you’ve maxed out your ISA allowance.
In a nutshell, bonds serve as loans to businesses or governments, with a fixed rate of returns that are linked to the level of risk you take on. This means that you can select bonds that match your financial goals and risk appetite.
For a low-risk strategy, UK government bonds, known as gilts, are largely considered safe, and while you’re liable to pay income tax on the premiums you receive, gilts are not subject to capital gains tax.
Sustainable Saving
If you’re concerned that you may exceed your ISA allowance this tax year, don’t worry. There are many strategies out there that can keep your wealth safe while maintaining an element of tax efficiency.
Finding sustainability in your investment strategies can be key to reaching your financial goals, so take the time to assess your overflow options and pick a solution that suits your needs best. Keeping your hard-earned money away from the tax man can be a challenge, but there are many beneficial ways to make your savings pay off long into the future.
